Now, “bid” is the selling price. This is what you sell the asset at. The higher of the two is the “ask price” or buy price; the rate at which you buy the asset. The difference between these two prices is the “spread.” This is your cost of trading. Depending on how liquid your asset is and your choice of broker, the spread can be tight or wide. For instance, an ECN broker can source quotes from a large pool of liquidity providers to offer you the tightest bid/ask spreads.
A significant advantage of CFD trading is the opportunities to hedge your portfolio against short-term market volatility, within an existing position. Hedging is a strategy you can use when you want to invest to protect against downside risks. You can also limit your gains to do this.
So, let’s say you have an equity portfolio worth AUD 150,000, consisting of prominent shares on the ASX 200 index. These are split up in 10 tranches of AUD 15,000 each. You could own AUD 15,000 worth of Adelaide Brighton shares and AUD 15,000 worth of ANZ Banking Group Ltd.
Now, if you believe that both these companies might suffer a short-term dip in share price, due to a bad earnings report, you could offset some of the potential loss by going short on them through a CFD.
Instead of selling these shares in the open market, you assume two CFD short positions in Adelaide Brighton and ANZ Banking Group Ltd. About 10% of the market exposure, which is AUD 3,000, could be required to set up this hedge.