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Glossary
Hedge
Definition
A hedge is a tool used to limit exposure to investment losses. For example, an investor who has large, unrealised profits in a physical stock or stock option position might sell a CFD for the same stock to prevent any loss of the profits. While the hedge ensures profit in this case, it also ensures that the profit cannot grow. In other words, when you hedge you limit your profits as well as your losses.
What is hedging?
A hedge is an investment strategy used to reduce the risk of adverse price movements for an asset. It typically involves taking an offsetting position in a related security, such as derivatives. The goal is not to make a profit but to protect against losses.
Why is hedging important to consider when trading?
Hedging is crucial in trading as it helps manage risk and stabilise returns. By hedging an investment, traders can limit their exposure to price fluctuations, which is particularly important in volatile markets. While it may reduce potential profits, hedging provides a safety net, making it a key strategy for conservative investors and those looking to protect their portfolios from market downturns.