What it is
Hedging is a strategy to manage risks while investing. It is often done by investing in an asset that could potentially offset any loss from another investment.
Investors usually hedge their investments by putting money in 2 different products that tend to move in opposite ways. This means when one investment is going down, the other is likely to go up.
What it means for you
You can practice hedging to potentially lessen the risk of loss while investing. If an investment drops in value, the other investment might grow, offsetting some or all of the losses.
This is especially helpful when there’s uncertainty in the market and you’re worried about its impact on an investment. If that investment tumbles but you’ve hedged against it, then the loss might not affect you much.
On the other hand, if the investment performs well despite uncertainty, hedging will likely reduce any potential profits.
Hedging doesn't remove risk completely. However, it can help you protect your portfolio from the effects of negative market movements.
It's a way to cut potential losses while sacrificing some potential gains for the sake of safety.
