What is Hedge?
A hedge is an investment or trade made specifically to reduce the risk of adverse price movements in another position, essentially buying insurance against potential losses.
Hedge Explained
Hedging costs money (like insurance premiums) but protects against catastrophic losses. Common hedging strategies include buying put options on existing holdings, holding cash reserves, or taking offsetting positions in negatively correlated assets. The goal isn't to eliminate risk entirely but to bring it within acceptable levels.
Real-World Example
You have a $50,000 portfolio of tech stocks. You're concerned about a potential market downturn, so you buy S&P 500 put options costing $500. If the market drops 15%, your puts gain value and offset much of your portfolio loss. If the market rises, you're out $500 — the cost of your 'insurance.'
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