Hedge position stock market

Author: investory On: 19.07.2017

You have probably heard the term "hedge your bets," which, under one definition, means to make smaller bets on different outcomes in case your large bet does not work out. Hedging in the stock market works the same way. You set up strategies or buy securities in case your stock market investments go down in value instead of up. Stock market strategies can be divided into speculating and hedging strategies. If you buy a stock on the belief the stock will go up in value, you are speculating on that stock.

You could also speculate the stock will go down by selling shares short. If you own stocks you expect to go up in value, and you buy a security or set up a strategy that will offset or minimize any losses if your stocks go down, you are hedging your stock market investments. Hedging protects against potential losses if a speculation does not work.

In this use of the term, speculation can be a long-term stock market investment plan as well as short-term trading. There are different ways to hedge stock market investments.

A simple hedge is to set stop-loss orders against your stock investments. A stop-loss order directs your broker to sell your shares if the price declines to a preset level. The stop-loss hedges against the risk of a large decline in your stocks, instead producing a smaller loss if the hedge is triggered. Other ways to hedge in the stock market are to buy put options on individual stocks or market indexes, sell short stock index futures or buy shares of inverse exchange traded funds, or ETFs.

All hedging strategies have an associated cost. The costs may be the actual cost to purchase the security or lost profits if your hedge reduces the gains if stocks go up instead of down. For example, it costs very little in commissions to sell short stock index futures.

However, if the stock market goes up, a futures contract will decline in value by about the same amount of money you gained in the stock market on the portion of your portfolio hedged by the futures.

hedge position stock market

An inverse ETF will produce similar results to using futures -- a close to zero gain or loss result. With options, you can only lose the money you paid for the options, so a big market gain can cover the cost of put options used to hedge. However, options are only good for a limited amount of time and if you predict incorrectly when the market will fall, your hedging with options may be ineffective.

The decision as to whether to employ hedges woolworths chermside labour day opening hours your stock market portfolio depends on several dda housing scheme 2010 earnest money. Consider the size of your portfolio, whether your outlook is long- or short-term and your familiarity with the derivative securities products used to hedge the market.

Most individual stock market investors do not attempt to hedge against losses and accept the shorter-term hedge position stock market and down swings in the market. If you want to try to hedge against a down market, consider hedging a portion of your portfolio and judging the results and costs for yourself.

Tim Plaehn has been writing financial, investment and trading articles and blogs since His work has appeared online at Seeking Alpha, Marketwatch.

Plaehn has a bachelor's degree in mathematics from the U. Each week, Zack's e-newsletter will address topics such as retirement, savings, loans, mortgages, tax and investment strategies, and more. At the center of everything we do is a strong commitment to independent research and sharing its profitable discoveries with investors.

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How to Hedge Long Equity Positions | Finance - Zacks

What Is a Hedge in the Stock Market? More Articles How to Hedge Long Equity Exposure Cheaply How to Sell Stock Long How Do I Buy a Single Stock? How Hedging Works Stock market strategies can be divided into speculating and hedging strategies. Types of Market Hedging There are different ways to hedge stock market investments. Costs of Stock Market Hedging All hedging strategies have an associated cost.

References 4 Hedge Fund Marketing Alliance: Hedge Fund Strategies The Market Oracle: Stock Market Hedging Strategies: Tight Trailing Stops and Inverse Funds BlackRock: Hedged Share Classes Explained OptionTradingpedia: About the Author Tim Plaehn has been writing financial, investment and trading articles and blogs since Recommended Articles What Does It Mean When the Market Is Oversold?

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