21 December 2012

HEDGING V/S SPECULATION

Hedging is basically done to reduce the risk of your current investment positions. Lets say you are long on a stock , now if shares of that stock  drop significantly you may lose your profit or increase your losses.

To counter that, you may buy a put option contract of stock which allows you to sell your shares at a specified price before the contract expires. Now, if it drops below the contract price, you can execute your put option  and sell your shares (to the option's writer) at a price higher than the market. Thus, you have the ability to lock in a guaranteed price for your asset no matter what the market price is.....
A hedge is a strategy intended to protect an investment or portfolio against loss. It usually involves buying securities that move in the opposite direction than the asset being protected.
 Hedgers look to protect against a price change; they make their buy and sell choices as insurance, not as a way to make a profit, so they choose positions that offset their exposure in another market.
Making an investment to reduce the risk of adverse price movements in an asset. Normally, a hedge consists of taking an offsetting position in a related security, such as a futures contract.

With speculation, the risk of loss is more than offset by the possibility of a huge gain; otherwise, there would be very little motivation to speculate Speculators look to make a profit from price changes. Gambling depends on totally random outcomes or chances.
Hedgers try to reduce the risks associated with uncertainty, while speculators bet against the movements of the market to try to profit from fluctuations in the price of securities.

2 comments:

  1. I read your article about hedging & speculation. That was amazing, Your thought processing is wonderful. The way you tell the thing is awesome.
    Thanks for the post.
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