Is CFD Trading Helpful for the Long Term Buy and Hold Investors?

Traders speculate if Contracts for Difference or CFDs are an investment instrument for the any long term buy and hold investor. Now we will look into the various reasons why long term buy and hold traders could find CFD trading useful.

Using CFDs as a risk protection strategy on your existing portfolio

A lot of retail investors and traders have no idea that money managers make use of Contracts for Difference as tool for risk protection. Let’s say you own 5,000 Woolworths shares and you have no plans of selling them, then you can choose to take out CFD position that is for short term for 5,000 CFDs. This means every time WOW shares rise or fall, your portfolio doesn't make or gain any money. You've effectively hedged your position once you short say the equivalent amount of CFDs short.

One of the advantages of this kind of strategy is that the CFD broker gets to pay you the interest every day you are holding the position short. They commonly pay you with 2-3% less than the current cash rate you have. So if the current bank rate is 3.5% you might earn 1.5% per year. It still is a credit to your account even if it’s not that much.

To protect your downside risk you make use of CFDs instead of the options

One of the disadvantages with option trading is that in Australia you need to own parcels of 1,000 shares and when you buy or write options it is done on 1 contract being the equivalent of 1,000 shares. If you are used to hedging your portfolio with the use of options then you are limited to only blocks of 1,000. If you have 3,468 shares of BHP, what happens then? How can you hedge that amount? You either have to take out 3 or 4 put option contracts and as you can see that is not a perfect hedge.

This is one of the best perks of using Contracts for Difference

Instead of worrying about a possible short fall when buying the put option for 3 contracts you can simply short sell the exact quantity in CFDs. A number of long term buy and hold investors or traders make use of options to protect their blue chip investments and at the same time earn from the interest that are paid to them for every day they are short.

Those were the 2 most powerful means long term traders can use CFDs for their portfolio. With such flexibility you should see how CFDs can benefit you.

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