A lot of online brokerage firms have discouraged some
trading strategies available in the market which includes scalping. But most
allow hedging in their platforms.
You might have heard of the term through other traders who
had experience using the strategy. But have you fully understood what hedging
actually means?
First, let’s clarify what a hedge really is.
Basically, a hedge
is the investment you make to help protect your assets from the risk of adverse
price movements. Sudden fluctuations can
occur in the financial markets, you have to be prepared for such events and
having a hedge is one of the perfect ways to do it.
Theoretically, a perfect hedge is an investment that will
remove all the possible risks in a position or portfolio, meaning that the
hedge is 100% inversely linked to your vulnerable assets. This is the ideal
type of hedge, but even a theoretical hedge like this will not be without cost.
Let’s now continue towards the main topic.
What is Hedging?
Hedging is a practice that every investor should know. It’s
completely important for an investor to protect his or her portfolio.
Hedging is always talked about in the financial industry,
more so than explained actually. But don’t let that fool you into thinking that
it only exists in the most arcane financial realms. Both beginners and
professionals can learn about hedging.
The easiest way to explain hedging is by considering it as insurance.
Just like with all your important belongings, you make investments by buying
them to insure yourself from possible harm in the future. When you decide to
hedge, you’re protecting yourself from any negative event that may come your
way.
You should remember that hedging does not completely
eliminate the impact of a negative event. It simply lessens it so that the
losses you may incur in such cases will not be as big without the investment.
You can practice hedging by taking an offsetting position in
a related security like a futures contract.
Different people in the financial industry use hedging. There
are portfolio managers, individual investors and corporations who use hedging
techniques to reduce their exposure to different risks in various markets.
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