MF Global

Trading any Market Direction

CFDs offer the opportunity to trade the market in both directions. So whether the underlying share is rising or falling, the investor is able to speculate on future share price movements with CFDs. Short selling is the act of selling a position that you do not have and buying it back later at a lower price i.e. when we expect the price to fall, the exact opposite of what to do when we expect a price to rise.

CFDs also allow the investor to obtain the benefits of short selling shares without being subject to the restrictions imposed on short selling the share in the underlying market, or the need to borrow the stock in order to short sell. Trading short with CFDs also gives the investor the added bonus of receiving interest on open positions.

Gearing

Gearing is the ability to take a position with an exposure greater than the cash outlay required. Because CFDs are traded on a margined basis, investors are able to use their capital more efficiently, because they only need to allocate a small proportion of the total value of the position to secure a trade, while still maintaining full exposure to the market.

For example, share trading gives the investor leverage of 1:1. That is, for every $1 of investment the investor is required to pay $1 in cash. A CFD position with a 5% margin requirement has a leverage factor of 20:1. This means that for every $1 of investment, the exposure is $20, or multiplied by a factor of 20. This increased gearing means that returns on investments are multiplied and this applies equally to gains and losses.

The advantage of being able to trade on margin or gear your investments is that you can either trade the same size positions as you would do with traditional shares but you free up equity to use elsewhere. This capital preservation is a more efficient use of capital because you only have to allocate a small proportion of the total value of the position to secure a trade, while still maintaining full exposure to the market.

Hedging

By using CFDs as part of an existing portfolio, you can efficiently and effectively hedge against any adverse price movements in your share portfolio. A decrease in the price of a share can be counter balanced by taking a short position in a CFD over the same share. This is particularly useful if the investor has a negative short-term view on the share’s price, but has a more positive longer-term view on the share’s price or otherwise would like to hold onto the underlying shares. By hedging in this manner, investors are also using their capital more efficiently, as they can fully hedge their share portfolio with a fraction of the cost.