The global financial markets are constantly changing, and online trading sites change with them. Today, it’s common for CFD traders to face not just a few dozens of financial instruments to choose from, but hundreds of them. Vestle, for example, offers 800 CFDs from multiple markets and before traders even begin to explore the risks and opportunities they present, they usually need to figure out how much they want to spread their attention. Should they focus on a single instrument, a few or follow multiple opportunities as they appear?
While the answer to this last question is completely up to your own preferences, here are just 5 things you need to know about portfolio diversification.
1. It’s a strategy
For online traders, decision regarding portfolio diversification is not just a matter of personal preference but a key element of their trading strategy. Spreading your attention on 100 financial instruments in 5 different markets requires a whole different skillset than opening 100 deals on one instrument. We’re not saying one is easier or more complex, but it’s certainly different, and you should take the time to practice and improve your tactic. If you want to train and test your knowledge before you invest real money, you can use a Demo Account.
2. It can be used to hedge against risk
In certain cases, traders diversify because they want to access opportunities in different markets, but in many cases, portfolio diversification is used as part of hedging. A trader might choose to invest in more volatile, so called “risker” instruments, and then “hedge” risks by investing in less volatile instruments or so-called “safe haven” instruments. If you’re interested in this type of strategy, read more about it and gain further insight into the theory before deciding if you want to follow it or not.
3. Different ways to diversify
Some of the traders who diversify their portfolio invest in different instrument groups. For example, on the Vestle trading platform you can find CFDs on currencies, cryptos, commodities, indices, shares and ETFs. Another, less common, diversification method is to invest in the same instrument group but in different markets. For example, a trader might invest only in indices, but from different regions around the globe.
4. Information is crucial
Regardless of how diversified your portfolio is, information remains extremely important to traders. However, if you do choose to diversify, you might benefit from accessing more diversified information resources and achieving a broader understanding of how different instruments behave. By following financial news, an economic calendar and other resources, you can gain insight into different instrument groups and make more informed trading decisions.
5. Employ risk management
Some people believe that portfolio diversification is a part of their risk management strategy, but even if this is true (and we’re not saying it necessarily is), it’s only part of the strategy – not a standalone tool. Portfolio diversification does not excuse traders from taking further steps to protect their investments such as using market orders, conducting proper research and deciding in advance their risk appetite, and if you choose to use it as part of risk management, do it with sufficient knowledge at your own discretion.
The materials contained on this document have been created in cooperation with Vestle and should not in any way be construed, either explicitly or implicitly, directly or indirectly, as investment advice, recommendation or suggestion of an investment strategy with respect to a financial instrument, in any manner whatsoever. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 64% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Any indication of past performance or simulated past performance included in this document is not a reliable indicator of future results. Full disclaimer: https://www.vestle.co.uk/legal/analysis-disclaimer.html