Hedging essentials for the trader

Hedging is a common strategy used by investors in order to mitigate volatility risk.

The main purpose of a hedge position is to offset any potential losses incurred by the investments.

Not to generate profit or gain value. Insurance policies are one of the most basic and widely used forms of hedging.

The primary purpose of insurance is to provide the policyholder with protection from potential financial losses and other undesirable events.

There are two main forms of financial hedging.

The first one is to take an opposite position compared to your original investment. So for example, if you buy Apple stocks and you don’t want to sell those stocks.

Then you might want to short Apple stock CFD-s on leverage to offset any potential foreseeable losses.

Since you might not have an equal amount of capital to open a hedging position you might want to use derivatives with high leverage.

Most financial instruments, such as equities, futures contracts and derivatives, with high leverage, can be utilized best for this purpose.

Another method that individual investors use for hedging is the diversification of their investment portfolio. Ideally, losses incurred by poorly performing instruments becomes offset by the gains made by more stable and less volatile indexes, or Exchange Traded Funds (ETF) within a well-diversified portfolio.

This type of hedging is the most common and typically it is not referred to as hedging in the strictest meaning.

Investors who wish to invest their capital in a diversified group of assets, but do not have the time or expertise required to analyze and select those individual assets themselves, have the option to choose pooled investment funds.

Investment funds, such as hedge funds, mutual funds, and index funds, are popular investment vehicles for conservative.

As well as long-term investors who want a good balance of risk-versus-returns.