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How does "hedging" work in investing?
(lemmy.world)
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this post was submitted on 13 Nov 2024
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https://www.investopedia.com/trading/hedging-beginners-guide/
More like bet 80% on a likely thing and 20% on a disaster.
Thats more like the gambling we all know and love
Can we learn to estimate these odds on sight like that?
It's not so much about estimating odds as it is limiting the potential downside. Hedging is the rational part of things lol
Can you give me a really classic and rational/prototypical example or hedging? Like is it be stretegically cynical/ Thinking in Bets?
The classic non-stock example is the apple farmer. Apple trees take a long time to grow, years before they produce any significant amount of apples.
Suppose I plant an orchard of the new Awesome Amy Apple trees. I'm betting those will really take off in two years, so they'll be really profitable. But since these apples are my entire income, and I'd rather not eat an entirely apple-based diet by then, I'm going to hedge my investment. I'm giving up some profit to reduce my risks.
I'm making a contract to sell half my apples for, say, 20 dollars per bucket. Now, they might be worth 40, but they might also be completely worthless if the Perfect Pete Apple becomes more popular. So I'm giving up some potential profit in exchange for certainty by hedging.
Another type of hedge would be me planting 75% Awesome Amy, and 25% Perfect Pete. I'm still assuming the alliteration will win the day, but by spreading my investment around, I'm reducing my risk.
To translate this to the stock market, the first examples would be to buy options for the future. The second example is simply spreading your investments.
Me reading this like "Noooo, if you plant Awesome Amy Apples you won't get Awesome Amy Apples, you have to graft Awesome Amy Apples branches onto existing apple trees to get Awesome Amy Apples!"
Does it at least take a long time, thereby not entirely ruining my analogy?
It doesn't ruin the analogy at all because you'd still need to plant apple trees to make an orchard! It's just that apples aren't true to seed so apple trees you plant give nasty apples. It's more of a fun fact about apples lol.
Options trading is very much more like gambling than traditional buying/selling stocks.
Unless you have in depth knowledge of the company operations or at least the very specific industry a company is in and all of their major investors, most stock investing is gambling these days. And with options, shorting, etc., even moreso. It's more about knowing when a stock will make large changes and taking advantage of those changes than actually investing in a company that you believe in. And the value of companies has little to do with actual viability of the company or it's assets, only the short term estimation by major investors of their profit. A single wealthy investor or investment firm can easily manipulate the price simply by buy or selling in large enough amounts and automated investment platforms cause a lot of fluctuations. It only works because retirement funds now are used to keep the market stable because no one wealthy and powerful has them, so they're good for sacrifice.