Hedging

Hedging is a strategy that allows you to reduce the risk of negative price movements in your portfolio. Hedging refers to opening an equal but opposite position to offset any short term price movements in your physical shares. If you hold shares in your portfolio that you wish to protect from a potential falling share price you can open an equivalent short CFD position to protect their value. If the CFDs are bought back after a decline, then the profit achieved from the CFD trade should offset the loss incurred on your physical shares. CFDs are flexible and cost effectively way to protect the value of your physical shares while retaining your holdings and without incurring a CGT liability.

Short Selling

CFDs offer you the ability to sell shares in companies that you do not own. Short selling a CFD can be done as easily as buying a CFD to benefit from a rising share price. If you consider a share price to be overvalued, CFDs allow you to go short (sell) to benefit from a falling share price. When a short CFD position is held overnight, you will receive interest on your position. First Prudential Markets offers the largest range of shortable Australian CFDs with over 350 available and we have the flexibility to add additional CFDs to our shortable list in request.

Diversification

Diversification is a risk management technique that involves allocating funds to a variety of shares to spread the risk across a number of companies. CFDs are an ideal diversification tool due to their lower capital requirement and lower transaction costs. A diversified portfolio allows you to gain exposure to a number of positions across multiple companies, sectors and even asset classes to limit your potential risk in any one position by spreading the risk across a number of positions to enable you to achieve more stable returns.

Self Managed Super Funds

Following a recent tax ruling by the ATO (ATO ID 2007/56) you are able to use CFDs within your SMSF under certain circumstances. CFDs can be used within your SMSF to protect the value of the shares you hold in your SMSF and increase your market exposure through leverage.