Investors may find difficult to maintain stability in Investment portfolios when they have high risky assets such as stocks, which are a great investment vehicle since they can generate high returns, but they also come with significant risk. This is why expert investors continually scour the market in search of the best safe assets or lower-risk assets to reduce their portfolio’s volatility and balance their investments through hedging.
A hedge is an investment that protects your finances from a risky situation. Hedging is done to minimize or offset the chance that your assets will lose value. It also limits your loss to a known amount if the asset does lose value. Most investors who hedge use derivatives, which are financial contracts that derive their value from an underlying real asset, such as a stock. An option is the most commonly used derivative. It gives you the right to buy or sell a stock at a specified price within a window of time.
Diversification is another hedging strategy. You own an assortment of assets that don’t rise and fall together. If one asset collapses, you don’t lose everything. For example, most people own bonds to offset the risk of stock ownership. When stock prices fall, bond values increase. That only applies to high-grade corporate bonds or U.S. Treasuries. The value of junk bonds falls when stock prices do, because both are risky investments.
Risk is an essential, yet a precarious element of investing. Regardless of what kind of investor one aims to be, having a basic knowledge of hedging strategies will lead to better awareness of how investors and companies work to protect themselves.
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Rani Tarek Jarkas, the founder of Cedrus Investments and a highly experienced and accomplished financial services executive, has a wide network of offices in Hong Kong, Shanghai, Beijing, Shenzhen, Jakarta and New York. Rani Jarkas Firm renders quality, customized, complete suite of strategic advisory and investment banking services to innovative and emerging technology companies worldwide.