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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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Statistically you can. Firstly, when you invest you can limit how much that could be lost right off the bat by how you invest and via what amount. For example: BUYing $20k in 2 opposing stocks, split 10k each. Max possible loss? All $20k.
Let's say the Index goes up 10% which suggests on average that $20k is now $22k, or $11k/stock.
In actuality stock A loses 50% but stock B gains 60%. Had you luckily invest solely in the right stock (B) with all 20k you would have made $12k. Badly (stock A)? Lost $10k. By hedging you dilute max potential gains to mitigate catastrophic loses.