A hedging transaction takes a position that protects an investor from substantial losses in another position.Hedging is like insurance. Frequently, hedging involves the use of derivative instruments, such as options or future contracts. Investors use them to reduce portfolio risk or to lock in profits. For example, an investor owns shares in Conglomo Corporation, and expects them to rise in value. To protect herself from losses that would result if Conglomo’s stock value fell instead, the investor buys a put option on Conglomo stock that gives her the right to sell it at a specific price in the future. This strategy limits how much she can lose. If Conglomo’s stock price falls below the strike price, the investor can exercise her put option, thereby offsetting losses incurred on the shares she owns. If Conglomo’s stock climbs, she will not exercise the put option. But gains realized when she sells her shares at their new, higher value will recoup her losses from buying the put. Many investors hedge stocks that have experienced gains over a period of time and appear likely to fall. Hedging will hurt an investment’s profits, so like most kinds of insurance, investors usually hope they don’t have to use the hedging instruments they buy.