Headging is often considered an advanced investing strategy, but the principles of hedging are fairly simple. With the popularity – and accompanying criticism – of hedge funds, the practice of hedging is becoming more widespread. Despite this, it is still not widely understood.
Everyday Hedges Most people have, whether they know it or not, engaged in hedging. For example, when you take out insurance to minimize the risk that an injury will erase your income, or you buy life insurance to support your family in the case of your death, this is a hedge.
You pay money in monthly sums for the coverage provided by an insurance company. Although the textbook definition of hedging is an investment taken out to limit the risk of another investment, insurance is an example of a real-world hedge.
Hedging by the Book Hedging, in the Wall Street sense of the word, is best illustrated by example.
Imagine that you want to invest in the budding industry of bungee...
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