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StockCram is not a broker-dealer, investment adviser, or financial institution. All content is for educational and informational purposes only and should not be construed as personalized investment advice. Consult a qualified financial professional before making investment decisions. Past performance does not guarantee future results.Simple Definition
An investment made to reduce the risk of another investment.
Why It Matters
Hedging is like insurance - you pay a small cost to protect against big losses. If you own a lot of one stock, you might buy put options as a hedge. Gold is often used as a hedge against stock market crashes. Perfect hedges are rare and expensive; most investors use diversification as their primary hedge against risk.
Key Points
- Common hedges: Put options, inverse ETFs, gold, treasury bonds
- Hedging costs money (premiums, opportunity cost) - it reduces both risk AND potential return
- Most individual investors are better off diversifying than trying to hedge specific positions
Related Terms
Common Questions
An investment made to reduce the risk of another investment. Hedging is like insurance - you pay a small cost to protect against big losses. If you own a lot of one stock, you might buy put options as a hedge.
Hedging is like insurance - you pay a small cost to protect against big losses. If you own a lot of one stock, you might buy put options as a hedge. Gold is often used as a hedge against stock market crashes. Perfect hedges are rare and expensive; most investors use diversification as their primary hedge against risk.
Common hedges: Put options, inverse ETFs, gold, treasury bonds
Hedging costs money (premiums, opportunity cost) - it reduces both risk AND potential return
Most individual investors are better off diversifying than trying to hedge specific positions