Hedging Is An Important Part Of Futures Trading
Hedging is used when the market conditions are very adverse and it helps you to protect your trade positions from being in a loss. So when you trade it is important to understand what hedging is all about.
Understand what hedging is
Suppose that you have some land and that is lying vacant. You decide that you can put some flowering plants here instead of leaving it barren. You take care of the garden and this lets you enjoy the flowers that bloom in your garden. But when that happens the garden starts getting attention by cows that want to graze on that land. They are spoiling your hard work.You want to take care of it and thus erect a fence around it. This makes sure that your garden stays fresh and protected.
This is a simple example of a daily life scenario that lets you understand what hedging is all about. You pick up stocks and make our portfolio by carefully analyzing which stocks should be and which should not be a part of your portfolio. This is like your garden. But at some time after being invested you see that the economy is not doing well and the market could crash at any moment. This is like when the cows enter your garden. To prevent this you hedge your portfolio by buying futures. This helps to protect your portfolio.
This is the basic explanation of what hedging is all about. It is a way that you save your investments in the market. Thus when you hedge your portfolio you make sure that the portfolio is not affected by the adverse movements in the market.
Why should you hedge?
Why should you hedge your position in the market? I suppose you have a stock that you have purchased and you now feel that the market is not performing well and the stock price will decline. You can do one of the following about it. You could just sit back and wait for the stock to decline and then bounce back. You could either sell off the stock or then buy it back at a lower price. Or the third option is that you could hedge your position.
There are reasons why you would realize that hedging is a much safer and better option among the others. Learn more about it here. It also gives you peace of mind because you know that your investment is protected.