money sectionmoney sectionA hedge is a type of investment used to mitigate risk affecting the bulk of your portfolio. If you have a bundle of stocks that are risky, yet potentially lucrative, it is usually a good idea to make investments that are less risky to cushion the risk you are presently carrying. Two specific forms of investment, the futures and options market, have been used successfully to mitigate risk.
To invest like the pros, you need to know how to hedge your portfolio. This action helps decrease the risk of loss and can help you turn profits (or prevent losses) during an economical downturn.
Financial hedging is a method for protecting invested assets from risk. Investors use it to reduce the potential money that they might lose on their outstanding positions. Many traders use options (and futures options) to reduce their risks. An option can be used to ensure that a trader will only potentially lose a certain amount of money on any trade. Options are securities that give the buyer the right (but not the obligation) to purchase or sell a certain security at a certain price (the "strike price") before an expiration date. Put options give the holder the right to sell…
Inflation is an economic phenomenon where a given amount of currency purchases fewer and fewer goods and services over time. During periods of inflation, gold has traditionally increased in value as people divest themselves of currency in favor of the precious metal. This suggests a possibility for a "hedge", a financial plan where assets in one class are expected to rise in value as assets in another class decrease in value, with the goal of preserving the original value of all assets.
