CFDs Case Study

Client X is concerned about the vulnerability of equities he does not wish to sell at this time.

Client X has an investment portfolio with Killik & Co managed by himself but with advice from his Broker. He has a number of equities in his portfolio that he has concerns about but does not wish to sell at the present time for Capital Gains Tax (CGT) reasons.

His question is simple: Is there a way in which he can hedge these same stocks in the short term and thereby possibly mitigate some or all of a possible loss should they suffer a downturn?

He talks to his Broker and he recommends Contracts for Difference (CFDs), part of Killik & Co’s Trading Services. As his Broker explains, CFDs are not for every investor and are high risk, but they do offer Client X the ability to cover his position without actually having to buy the stock. In fact, Client X initially has to pay typically 10% of the actual price of the stock.

That’s because CFDs are leveraged; you buy the change in the price of the stock rather than the stock itself. Should the stock move with your expectation you may gain several times your original outlay; on the other hand, should it move against you, you may lose more than your original deposit or margin.

Although initially a little complex to understand, Client X, with the help of some detailed literature and conversations with his Broker, develops an understanding of the mechanics of CFD trading and the risks involved.

Thanks to some timely, leveraged CFD trading Client X has found an efficient, economical way to hedge certain equities holdings in the short term. His Broker congratulated him but did take the time, yet again, to remind him of the potential risks involved.

At a glance...

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The Risk Factors

CFDs and Spread Betting are leveraged products and can result in losses that exceed your initial deposit. Trading in these products may not be suitable for everyone, so please ensure that you fully understand the risks involved by consulting closely with your Broker.