Contracts for difference has always be seen as a rather conservative means to accrue a sustainable income over time. However, 2016 has proven to be somewhat unpredictable in terms of common assets such as currency pairs and securities. Many traders may choose to sit on the fence while others are looking towards index positions in 2017. Why is this the case and how such these CFD options offer (potentially) more stable returns when compared to other methods?
An Exodus from American Holdings?
Some of the more reactionary analysts have been keeping a close eye on billionaire investors such as Warren Buffet. Over the past few years, his investment firm Berkshire Hathaway has performed a rather massive cull in regards to its holdings in Johnson & Johnson, Kraft and Proctor & Gamble (1). Some feel that such moves indicate a potential crisis on the horizon; at the very least for shares within the United States marketplace. Although this could simply be a way of shifting his money around, some are left wondering whether or not he has been provided with inside information.
The advantage here is that index-based CFDs are comparably immune to a large drop within a single asset (such as Proctor & Gamble). Let us not forget that the Dow Jones Industrial average (DJIA) contains 50 of the most valued companies while the S&P 500 (obviously) accounts for an additional 500 firms. The main takeaway point here is that even a major drop in a blue-chip stock is likely to be comparatively muted for those who are involved with indices (2).
An Alternative to Currency Pairs
There is no doubt that the Forex markets can prove to be very lucrative. However, higher liquidity always correlates with a greater level of risk. This may not bode well for investors who are looking to avoid volatility in the coming 2017 fiscal year. The Brexit vote, the hesitance of the Federal Reserve to implement an interest rate hike and continued problems within the European Economic Community could all signal that investors are taking a much more doveish stance in terms of currency trades.
One viable alternative can be to focus more upon index-powered CFDs. The principle behind this move is very much the same as we had mentioned in the last paragraph. Indices are so broad in scope that they have a greater ability to ward off the effects of knee-jerk market movements associated with a pair of currencies. Conservatism may very well rule the 2017 investment markets.
Regionally Based Movements
Although index-backed CFD trades are without a doubt more stable by their nature, this does not necessarily signify that profits will be marginal. In fact, many investors are looking towards flagging regional economies such as those within the Asian marketplace. Some predict that major powerhouses such as China may be headed for a protracted recession. Having said this, the point to consider is that pairing a strong index (such as the FTSE) against a weaker region can prove to offer potentially wide margins for profit.
Another point to bring up is that it would be impossible (and dangerous) to only possess holdings within a specific index. This lesson was made quite clear during the 2008 financial crisis. Diversification is key and thanks to the sheer variety of indices offered by reputable firms such as CMC Markets, astute investors have a number of choices. In fact, it is not entirely uncommon for a trader to posses numerous index-based CFDs to further limit his or her risk.
Just the Facts
It is likely that the phrase “risk aversion” will feature prominently during the 2017 fiscal year. Still, this does not dictate that investors should “sit on their hands” and wait for clearer skies. CFDs have always been excellent ways to hedge against instability. A venture into this sector only makes sense when we consider the rather uncertain outlook associated with the next few months. However, it still needs to be said that contracts for difference carry their fair share of risk and there are no certainties. Investors who are looking for an edge should seriously consider utilising these unique trading instruments.