What is Hedging in stock market| How to Hedge the investment| What are the ways to Hedge
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| Hedging |
Hedging is an advanced risk management strategy that involves buying or selling an investment to potentially help to reduce the risk of loss of an existing position. Hedging is a risk management strategy employed to offset the losses in investments, by taking a opposite position in related trade. Hedging requires a person to pay the premium for the protection of his investment.
What is Hedging in share market ?
The best way to understand hedging is, one can think it is an insurance against the investment. Hedging can save an individual’s investment during the negative events but to reduce. Hedging can not prevent all the negative events but it can reduce the impact of negative events. In share market hedging strategies generally involves derivatives such as Options and Futures contracts.
In general life you are very well concern with hedging, almost every one is doing hedging in different names in life. for example if you buy a car you take insurance to safe guard it from accident damage expenditure, it is one type of hedging of your asset (car) from damage.
In Stock market every one individual, mutual fund managers , big corporate houses & corporations use hedging techniques to minimize their risk . But in share market hedging is not a simple technique to use it.
Hedging against investment to minimize risk means strategically use financial instruments or market strategies. you have to judge the effect of these strategies for any advance price movement in the market.
How to use hedging in stock market?
To Hedge your investment you requires to trade in securities with negative co-relation with your investment, you have to pay some amount for that, it is called premium. It is one type of insurance to your investment.
Hedging is done by the usage of derivatives like Options and Future contracts. With the help of future & options you can develop trading strategies , where loss in investment can be reduced. If your are using Hedging in a best way you can safe guard your investment.
Different ways of Hedging in share market
1. Suppose you have taken any stock like SBIN for long term investment to safe guard your investment from any negative event or down fall you can buy a put option, this is called hedging .
2. If a manufacture of any product seems that in future the raw material of his product price will increased then he can purchase the future contract of that material.
3. There are so many different types of options and future contracts , an investor can Hedge any thing including stocks, commodities, interest rates or currencies.
4. A best example of forward hedge involves a wheat producing farmer who plant seeds but he is uncertain about the price of his product in future, he thinks if wheat price goes down then what he will do.so he can sell the future contract of wheat at present. this is called forward Hedge.
5. By buying lower strike price than current market price of underline asset.
6. A person can use Delta in hedging. Delta is a risk measure used in hedging.
7. Big companies used commercial hedging in commodities.
Disadvantages of Hedging
Every hedging strategy has a cost associated with called premium, it will minimize your loss but at the same time it also reduces your gain. Now the most important thing is that the target of hedging is not making more money but it is protection of your investment.
I hope you have understood the the basic idea of hedging. In future articles I will explain about various strategies of hedging . If you have any suggestion please comment me . Thank you.
If you want to learn more about share market please read these articles advanced concepts of stock market, Hilega Milega concept.
FAQ
Q-1
What is hedging?
Ans:-
Hedging is an instrument to protect your investment from negative events.
Q-2 Who can do Hedging?
Ans:-Every one who has investment and having fear of loss.
Q-
3 What are the various hedging strategies?
Ans:- There are so many hedging options available in market like spread , calendar etc.