| Are you sick and tired of loosing money in the stock | | | | profits instead it is used to reduce potential loss. |
| market? Keep reading because in this article I am | | | | How to hedge |
| going to give you a stock market tip that will help | | | | Hedging techniques involve the use of complicated |
| you to pout a stop to this. | | | | financial instruments know as derivatives, the two |
| This stock market tip is called, "hedging" and is a | | | | most common ones being options and futures. Here |
| practice that every investor should know about. The | | | | is an example of how it works, lets say you own |
| best way to understand hedging is to think about it | | | | shares of Xyz Company and want to protect |
| as insurance. When people hedge they are insuring | | | | yourself against potential losses. To do this you can |
| themselves against a negative event. Hedging does | | | | buy a put option on the company, this gives you the |
| not stop negative events from happening but it does | | | | right to sell your stock at a specific price. |
| lessen their impact. | | | | This strategy is known as a married put. If the stock |
| Hedging against investment risks means strategically | | | | price goes beneath the strike price the losses will be |
| using instruments in the market to offset the risk of | | | | offset by gains in the put option. There are many |
| adverse price movements. In simpler terms investors | | | | different hedging techniques but this is the simplest. |
| hedge one investment by making another. | | | | For all its benefits this stock market tip has its |
| To hedge you would invest in two securities with | | | | downsides, every hedge has it's costs so decide |
| negative correlations. Take note that hedging will | | | | before hand if the benefits out weight the costs. |
| affect your risk return trade off. A reduction in your | | | | Remember that the goal of hedging isn't to make |
| risk will always mean a reduction in your profits, thus | | | | money but to protect against losses, also hedging is |
| hedging is not a technique that you can use to make | | | | not a perfect science and things can go wrong. |