hedging
Making an investment to reduce the risk of adverse price movements in an asset.
Example
“The airline bought oil futures as a hedging strategy against rising fuel costs.”
Memory Tip
A HEDGE is a protective barrier around your garden. Hedging protects your investments.
Why It Matters
Hedging helps protect your wealth from unexpected market swings that could derail your financial goals. By using hedging strategies, you can sleep better at night knowing that a major price drop in something you own will not completely wipe out your savings or investment plans.
Common Misconception
Many people think hedging means they will make money no matter what happens in the market. In reality, hedging is purely defensive and costs money to implement, so it reduces potential gains while limiting losses.
In Practice
Imagine you own 1000 shares of a company stock worth $50 per share, giving you a $50,000 investment. To hedge against a potential price drop, you could buy put options that allow you to sell the stock at $45 per share. If the stock falls to $30, your put option protects you at $45, limiting your loss to $5,000 instead of $20,000, though you paid a premium for that protection upfront.
Etymology
From 'hedge' (a boundary or protective barrier) — protecting your investments with a financial barrier.
Common Misspellings
Protect your assets with the right insurance
Related Terms
More in risk management
Other risk management terms you should know
See Also
Need help with spelling?
Instant spelling checker with dialect variants for 2,000+ words.