Hedge

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DEFINITION of 'Hedge'

Making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.

INVESTOPEDIA EXPLAINS 'Hedge'

An example of a hedge would be if you owned a stock, then sold a futures contract stating that you will sell your stock at a set price, therefore avoiding market fluctuations.

Investors use this strategy when they are unsure of what the market will do. A perfect hedge reduces your risk to nothing (except for the cost of the hedge).

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    Hedging can be a vital part of overall portfolio management, but using it as a trading strategy requires spending significantly ... Read Full Answer >>
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    Hedge funds use short selling to profit from stocks whose prices they believe are going to decline in value. A hedge is a ... Read Full Answer >>
  3. When short selling, how long should you hold on to a short?

    An investor should hold a short sell position for as long as the investment is profitable and as long as the investor can ... Read Full Answer >>
  4. What is the difference between hedging and speculation?

    Hedging involves taking an offsetting position in a derivative in order to balance any gains and losses to the underlying ... Read Full Answer >>
  5. How are futures used to hedge a position?

    Futures contracts are one of the most common derivatives used to hedge risk. A futures contract is as an arrangement between ... Read Full Answer >>
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