Conventional investments encompass stocks, bonds, commodities, currencies, and Forex. The way that people dabble in the financial markets says a lot about their appetite for risk. For example, stocks are a medium to high-risk investment vehicle geared towards long-term growth. Since nobody can anticipate the future performance of a company, the expectation is that careful analysis of financial reports will enhance decision-making processes. For the most part, people tend to invest in 401(k)s with a variety of funds, ETFs, individual stocks, foreign and domestic holdings. The performance of the stock market is often fraught with uncertainty. In fact, it is this very volatility that drives traders and investors into equities in the first place.
Research tends to indicate that investors divert funds from stocks to gold when equities markets are declining. When geopolitical uncertainty lifts, people tend to feel more confident about equities markets and gold tends to suffer. This inverse relationship is well known with gold. It acts as a safe-haven asset during economic uncertainty. The price of gold is hovering around $1,300 per ounce, and it has a 1 year return of 3.57%. While this lacklustre figure doesn’t inspire much confidence, the 16-year return on gold is substantial at 308.09%. Gold functions in much the same way as the Japanese Yen for Asian economic stability. When news from China is poor, the Japanese Yen thrives. These two hedge investments can be used to great effect to shore up the value of your financial portfolio during uncertain times.
Using CFDs to Mitigate Losses with Equities Markets
Your appetite for risk determines your investment preferences. Younger people tend to be more risk seeking than older people who tend to be risk-averse. Conventional investment options such as savings in the bank, bonds, Forex holdings, and stock portfolios are common. However, recent changes to the financial landscape have resulted in the rise of alternative investments such as contracts for difference. A quality CFD Definition indicates that these are derivatives trading instruments on contracts between buyers and sellers.
The underlying instrument – stocks, Forex, indices, or currency is not traded per se. With a CFD, the price of assets is what matters. With a contract for difference, you can go long on an underlying financial instrument, or you can go short. The beauty of CFDs is that you simply need to call it as you see it. For example, investors with Google, Facebook, Microsoft, Caterpillar, or Amazon stock may be concerned about price declines. Rather than selling the stock and racking up losses, investors can purchase CFD contracts and go short on the stock and make profits in the process. These investment options serve as a hedge against downturns in equities markets.
A CFD is a speculative trade. It is possible to go long (take a positive perspective), or go short (take a negative perspective) on the underlying financial instrument. A myriad of options is available, including treasuries, currencies, indices, commodities, shares, and even cryptocurrencies. There are several notable differences between CFD trading and traditional trading with brokers. For starters, margin and leverage are used with CFD trading.
You don’t need to have all of the funds available for the full CFD contract price – a percentage is required and that carries you for the entire trade. This cuts both ways. When trades go your way, you finish in the money. If not, you finish in the red. Profits are determined by price movements per point. With CFDs, losses can be greater than your initial deposit.
Sources: cnn.com / finra.org