What is Hedging?

In the recent magazine issue, read your story on overvalued stocks that need to be sold. Can you please guide me about the hedging strategy that you referred to in the strategies part? - Swati Katkar 

Editor Responds: Thanks for writing to us. Hedging is an investment strategy used to reduce or mitigate the risk of adverse price movements in assets. It involves taking offsetting positions in related instruments or markets to balance potential losses. The goal of hedging is not necessarily to make a profit but rather to protect existing investments from unfavourable price movements.

For example, a stock investor might buy put options to hedge against potential losses if the stock price falls. Similarly, a company that relies on a particular commodity might enter into futures contracts to lock in a favourable price, thus hedging against future price increases.

Overall, hedging is a risk management technique employed by investors and businesses to minimise potential losses while still allowing for potential gains. Do visit DSIJ’s website for such interesting knowledge articles.