Hedging: Protecting Your Investments

Hedging is a risk management strategy used to offset potential losses in an investment by taking an opposite position in a related asset. It functions like an insurance policy for your portfolio, designed to limit the impact of adverse price movements. While hedging can reduce potential profits if the market moves in your favor, its primary goal is to provide downside protection and reduce overall portfolio volatility.

Common hedging techniques include using options, futures contracts, or investing in assets that are negatively correlated with your primary holdings. For example, an investor worried about a stock market decline might purchase "put" options or increase their exposure to gold and other defensive assets. By carefully implementing a hedging strategy, investors can navigate turbulent markets with greater confidence and preserve their capital during downturns.