What is Hedging and its Importance

By | 01/20/2018

Hedging considered as a financial toll, a strategy to reduces the risk. Hedging is very simple to understand but still unpopular among the beginners in the market. The aim of hedging is to reduce the losses from unexpected fluctuation arises in the market. Hedging is the processor to retain your profit from both sides of the row.

When you plan to hedge that means you are trying to reduce the risk, you can not prevent the event to occur but you can reduce the impact of losses.

Importance of Hedging

Everybody in Life uses to take the Life insurance policy, Why ? just to secure your family future they will get the Insurance amount when you are gone, this amount plays an important role in your family life.

Hedging is just like that, you are secure your investments from market fluctuation which will cause you huge losses.

Hedging Funds

Let’s take example on Hedging

While scrutiny you have found a company XYZ, which shows better prospects in future, on the other hand, the price of the company is very volatile, If you give some time to the market you must defiantly make money. You are very much confident with the company financial growth, but looking at the volatile market you want to reduce the risk.

Future & Options are the tools to risk out the losses through Hedging, Some investor uses to buy the shares when the price of the share is slipping down, he uses to averaging the share price, which basically reducing the purchase price of the shares in the whole, but it is possible when you are in the possession of huge amount of money. On the other hand, you can Hedge your investment through F&O trading.

Hedging Through Derivatives

As an investor You have purchase 1000 shares of Company XYZ, that share already achieve the strong move from $30 to $55, your investment is almost double, but looking at the market scenario and financial prospects of the company your calculation reveals that the share price of the company moves to $80. The concern is market correction which is the natural processor, that will probably drop the price of the share to $ 40 to $ 50.

Hedging comes in action in that situation, Instead of selling the share and book your profit, you go for selling a put option which in return provide you some amount of security and if the share price falls, the value of the shares you hold will definitely go down but on the other hand your security amount from put option increases. In result, you are at the same value of the share as previous.

Hedging Funds

Hedging Funds are an investment which not only plays in the stock market. Gold is one of the biggest Hedging funds which totally defeats inflation, most people use Gold for hedging against Stock market fluctuation. When the Stock Market crashes people use to buy Gold to save their investment. Study saws that around 20% investment is made through Hedge Funds.

In both the strategy your Investment is safe.

But you are probably wondering:

Hedging Plants

Hedging Plants includes-

  • Call Option
  • Put Option
  • Future Trading
  • Gold
  • Fixed Deposits
  • Recurring Deposits
  • Provident Funds

Bottom Line

Hedging not only works in the Stock Market but it will save you in every field, it will decrease your risk level. Hedging helps the investor to the certain level, if you use the hedging formula more then excess, it will also drag you down and you have to face huge losses.

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Amit Bansal
Amit Bansal
Hey, Amit Kumar Bansal, the man behind this blog. I always passionate about Taxes, Stock Market. This was one of the reasons why I have chosen the field of account. Blogging was not the coincidence it was a proper decision. The main aim of this blog is to help readers to take an informed financial decision. If you like my efforts kindly subscribe to this blog and also let your friends know about this website by sharing.

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