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What Does Hedging Means to an Investor?

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Hedging is simply about the process and management of risks occurring from the changes or fluctuations of prices. This is particularly common when it comes to trading any form of instrument. In other words, what this simply means is about the protection of a trade and position against any negative event in the market. Hence, when traders are engaging into this, they are, in fact, insuring or safeguarding a position.

With the foregoing, there are few things that traders need to understand about this concept. Some of these are the following aspects.

What is its Effect?

First and foremost, traders, most especially the beginners, need to understand that hedging does not prevent any unfavorable event from happening. Nevertheless, what this simply does is to provide less exposure of the position and investment from the risks. It is simply adding additional coating for protection. Further, its effectiveness may also be dependent on how well a trader executes the hedge.

How Traders do this?

On the other hand, another important aspect about hedging is how traders can do this. In a general, investors do this through financial instruments like derivatives. These include both futures and options. Options, as its name suggests, are investment positions providing a choice to the holder to either execute or not the contract. Futures, in contrary, are contracts obliging a buyer to purchase a certain asset in accordance to the agreement.

Value of Hedging for Investors

For investors engaging into buy and hold trades, they usually take for granted fluctuations in the short run. Hence, hedging might not be useful or meaningless at all. Nevertheless, it is still extremely relevant to know about this. This is because without studying its possible impact to a trade first, there is no way that a trader can analyze and appreciate its worth. After all, those derivates are available in the market for a reason. With the proper management and handling, investors can, in fact, benefit from them to the fullest.

In the end, what this simply suggests is that hedging is just a precaution to protect an investment. This does not guarantee sure win or profit at all. It may minimize losses, but there is no assurance that all investors can positively benefit from it.


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