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How does "hedging" work in investing?
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this post was submitted on 13 Nov 2024
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Hedging is done in many different ways. One of the easiest, that requires zero insight is a future hedge.
Say I hold 1000 shares worth 5 bucks each in company Bob. If the price goes up, that's great, but I'll need to replace my car in three years, and I'll need at least 3000 bucks for that.
So, I'm going to spend some money now on buying an option in 2 years 11 months to sell 1000 shares for 3 bucks per share. That way, if Bob company completely collapses, I'll always have at minimum 3000 bucks.
Of course, those options cost money to buy, so I'll have to pay to reduce my risk, but I don't need any real insight into the market to use this kind of hedge.