What is Hedging Strategy

Hedging as a concept is not well understood by many people and they tend to think that it is like speculation which is not the case. Those who invest in stock market and tend to hold stock for long term, never use hedging because they tend to think that it is a complex process. Hedging in reality is not difficult to achieve and anybody who has basic knowledge about derivatives market can do it.

Hedging strategy refers to protecting the downside risk of the portfolio of an investor. So for example if an investor is holding 1000 shares of company A and he or she except that stock A will be volatile in near future but does not want to sell the stock as long term prospects of the stock is good than he or she can use the hedging strategy. Therefore he or she will buy the put option of stock A in the derivative market. Now suppose due to volatility in the markets the price of stock A falls then an investor can enjoy the profits of put option and at the same time he or she can hold the stock without incurring any loss.

As one can see from the above that hedging strategy if used properly can be a boon for an investor and it is not that hard to achieve as it is not a rocket science, rather it is a simple approach which an investor can adopt depending on his or her views on the markets and stock in which he or she has investment.

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