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Spread Betting - A Smart Way To Hedge Your Investment Portfolio?

A lot of stock market traders copy the trading style of the great Warren Buffett and only invest in high quality market-leading companies. They are quite prepared to hold these shares for the very long-term so any short-term fluctuations are not that important. However there may still be times when it is more profitable to hedge your portfolio in some way.

For example if one of your shares has raced ahead of itself and you think it may be temporarily overbought based on it's current market valuation or it's excessive price/earnings ratio, then rather than sell some of your shares, you could take a short-term trading position instead. So you could use your spread betting company to open a short position on the company you are invested in.

This way you will guarantee some nice profits if the price does fall back to more realistic levels, and yet if the price continues to rise further your core share holding will more than compensate for any losses you may incur from this spread bet. The ideal scenario is for the share price to drop in the short-term so you can bank some profits from the trading position, and then rise in the longer term so that the value of your traditional share investments will rise as well.

This type of strategy is very common amongst investors and helps to protect your portfolio from sector weakness and falls in the wider stock market. For instance we know that shares (in good quality companies) generally rise in the long-term but there are always plenty of dips along the way when the sector you are invested in is going through a bad patch, or the wider economy is slowing down. When this happens even the best companies generally get dragged down so it always pays to hedge your portfolio, even if it is showing substantial profits.

A lot of investors think that spread betting is reserved for the short-term speculators, but although many traders do use it for this purpose, it is just as useful for the traditional buy and hold investor who wants to protect their portfolio. It's not available to all countries but it is a very popular trading tool here in the UK.

It's not the only hedging method you can use of course, because you can take short positions via share options and contracts for difference (CFDs), for instance. However these instruments are a lot more complex than spread betting, which I believe is one of the easiest ways to protect your portfolio from any short-term falls.

Source: Universal Accounting : http://www.universalaccounting.co.uk

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