The Importance of Hedging
It's a natural question that always comes up when people learn how to protect themselves against fire losses. Of course, I never get a question like this asked about other areas of finance and investing, but I guess I don't hear it in the stock market or in real estate.
The reason why I ask is because in today's financial market, investors have so many choices for dealing with a bad situation. They can choose to get out of the stock market, the real estate market, or even the futures markets. I'm sure some of them would rather just stick around, and my guess is that they would be more successful in the long run if they did.
But let's face it - in some cases there are good reasons to stay in the market. People make money by getting involved in the stock market, in the futures market, and in the commodities market. Yes, the stock market has some very high volatility, but when you're involved in the commodities market, you're investing in raw materials that are not available all over the world.
In the commodities market, you're investing in products that can be moved like butter. In the stock market, you're investing in companies that are publicly traded. In the real estate market, you're buying property that is owned by a company.
So in the commodities market, you're in possession of a product, you don't have to deal with foreign exchange. In the stock market, you've got all sorts of stress tests going on to determine whether the stock market will continue to grow or fall, and the commodities market doesn't have that many risks.
Now, how does this relate to me as an investor? If you're a hedge fund manager or a big-time trader, you might want to protect yourself against fire loss by keeping your portfolio managed. Your portfolio manages to stay on track and it helps to minimize your exposure to potential stock market risk.
But if you're a small-time investor who just wants to diversify and limit your risk, you don't really need hedges. You could go without any type of protection at all. However, most traders and hedge fund managers would tell you that you're better off having hedges in place.
Hedges are like insurance. You only need to have one type of insurance in place to ensure that you're covered in case the unexpected happens. That's just what hedges do for investors.
Hedges work by buying or selling a certain security, depending on your strategy, and making the necessary adjustments to the portfolio. This allows you to cushion your portfolio against losses. And the downside of hedging is that you may end up with a big return on your hedged position - if the market moves favorably.
One of the most important things to remember about hedging is that it takes control away from the investor. Hedging doesn't make decisions for you; it only allows you to make decisions in your best interest.
When you're investing in trading options, you don't really want to be the deciding factor for every trade. The majority of traders only call on their option when they're losing money. Unfortunately, in the end, they usually lose more than they gained.
They can also pick which options they invest in, and the private broker knows that more than a little downside is better than none at all. For that reason, hedging can be considered to be a way to protect yourself from fire loss.