Hedging Strategies: Risk Management in Financial Markets

Hedging is a concept that is utilized in the financial markets in order to minimize risk. In essence, the trader will make a trade that will limit the risk of the first transaction. This strategy can be used in every financial market, to some degree. For example, many individuals will use inverse index funds for this type of hedging strategy. If they have the majority of their money invested a traditional index fund, they could put a smaller amount of money in an inverse leveraged index fund. If the market goes up in value, they will earn money from the regular index fund. If the market goes down, they will earn twice the movement of the index from the inverse index fund. 

This strategy can also be used with futures contracts. For example, if you bought a particular stock, you might buy a futures contract that will pay you a certain amount of money if your investment starts to go down past a certain point. Hedging is utilized by many traders in order to reduce portfolio risk and increase overall profit potential.