When it comes to investing, the stock market can be unpredictable. One way to protect your investments from possible losses is through hedging. Hedging involves taking a position in an asset that’s negatively correlated with another investment you own.
For example, let’s say you own shares in a tech company that has been performing well but worry about the possibility of a market downturn. You could hedge by purchasing put options on an index fund that tracks the overall performance of the stock market. If the stock market does experience a downturn, your put option will increase in value, offsetting the potential loss in your tech company shares.
Hedging isn’t foolproof and can come at a cost. The price of purchasing put options or other hedging instruments can eat into your potential profits if nothing goes wrong with your original investment. Plus, there’s always the chance that both investments could lose value at once.
Overall, hedging can provide peace of mind for investors who want to limit their risk exposure while still participating in potentially profitable markets. It’s important to discuss any hedging strategies with a financial advisor before implementing them into your portfolio.