About Hedging
If you are looking into investing in the stock market, one of the more popular strategies that investors employ is called hedging. Hedging refers to the investing in specific areas or on specific stocks to reduce exposure and limit losses. Most of the time, hedging will prevent losses in the form from currency rates, commodity fluctuations and interest rates.
There are two common types of strategies that can help you hedge your stocks, they include put options and selling a company’s stock short. Put options are a kind of insurance policy for your stock. They can be expensive; however a put option is when you bet that the value of a stock will decrease. Buying a put option just gives you the right to sell if the price declines, however, you are not obligated to sell the stock.
Short selling is another way to hedge your bets and limit your exposure to loss. Selling stocks short can be very risky to say the least. However, if this strategy is used right, it can be very profitable. Selling a stock short is when you do not own the stock at a specific time, but promise to deliver a set amount of shares of a stock at a predetermined time. For instance, you take possession of 1,000 stocks of XYZ at $50 and sell those stocks at this price. Two days later, all XYZ stocks drop to $40, you then buy 1,000 shares of XYZ at the $40 price and deliver it back to the entity which sold you the original shares making a $10,000 profit.
While hedging sounds easy in theory, it can be extremely volatile in practice. Most experts advise that if you are new to investing, that you should stick to the fundamentals before venturing out and hedging on stocks.