Definition
Hedging
Hedging is taking an offsetting position to protect a portfolio against adverse price moves, like insurance for your investments.
An investor worried about a market fall might hedge by buying Nifty put options or shorting index futures, so gains on the hedge offset losses on the portfolio. A stock holder can buy puts on that stock to limit downside while retaining upside.
Hedging reduces risk but costs money (option premiums) or caps gains, so it is a trade-off, not free protection. It is used by institutions and sophisticated investors around events or uncertain periods rather than as a permanent state.
Related terms
- Open Interest (OI)Open interest is the total number of outstanding (not yet settled) derivative contracts in a futures or options market.
- Position SizingPosition sizing is deciding how much capital to allocate to a single trade or stock, to control risk across the portfolio.
- India VIXIndia VIX is the volatility index that measures the market's expectation of near-term volatility, often called the 'fear gauge'.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.