Every week we provide insights into popular assets and hot questions, so you can easily learn more about the investment market in bite-sized pieces.
In this edition of Markets in Focus, we take a closer look at hedging. What does it mean, and how can you effectively use it?
What is Hedging
Hedging is a risk management strategy used to protect an investment or an entire portfolio from potential losses. It involves opening an additional position that offsets the risk of an existing investment. The core idea is to reduce downside risk by establishing a position that moves in the opposite direction of your original holding. Various financial instruments can be used for hedging, and CFDs (Contracts for Difference) are particularly suitable for this purpose.
Example of a Hedging Strategy in CFD Trading
Here’s an example of how hedging works with CFDs:
- You own €10,000 worth of Apple stock in your portfolio.
- You believe in Apple’s long-term growth, but you’re concerned there might be a short-term drop.
- To hedge against that potential drop, you open a short CFD position on Apple, also for €10,000.
- If Apple’s stock falls, the loss on your shares is partially or fully offset by gains on the short CFD.
- If the stock later recovers, you still hold your Apple shares and can benefit from their upside — while your hedge has done its job during the downside.
Why Use Hedging with Change
Through the Change App, you can trade and hedge not just Apple, but over 350 margin instruments (including CFDs), available Monday to Friday.
Key Benefits & Considerations of Hedging
- Risk Reduction: Hedging helps you mitigate price risk without necessarily closing your original position.
- Flexibility: Many platforms offer a “hedging mode,” allowing you to hold both long and short positions on the same asset — each managed independently.
- Cost: Hedging isn’t free — you’ll usually pay margin when opening a CFD, and holding the position overnight may involve fees.
- Trade‑Off: While hedging can protect against losses, it can cap your potential gains — because your offsetting position eats into profits.
- Correlation Risk: To hedge effectively, the instrument you use for hedging must have a strong correlation with your original investment. If the correlation breaks, the hedge may not work as intended.
Until next week - stay hedged, stay safe!
