, individual investors and corporations to reduce risk exposure in anuses one investment to minimize the negative impact of adverse price swings in another.

Portfolio hedging typically entails the use of financialderivatives(options andfutures) to curtail losses. For example, an investor worried about short-term price swings in ABCstockcanhedgetheir stock portfolio against short-term losses by purchasing the same number of ABCputoptions. A decline in the value of ABCbe hedged, oroffset, by profits from the put options.

There are a wide assortment of options andfutures contractsthat an investor can hedge against nearly every type of risk. For example, hedges can be created to protect a portfolio from stock andcommodityprice movements, interest rate changes andcurrencyswings.

The purpose ofportfolio hedgingis to curtail potential losses. This safety also comes at a price, sincehedgingalso limits potential profits. Everyhedgehas a cost, so investors should weigh the costs of the hedge against its benefits. For mostbuy-and-holdinvestors, hedging is unnecessary, since short-term price swings in a portfolio wont matter.

How to Make Your Account Balance Go Up When the Market Is Going Down

Traditional Investing — The Buy and Hold Strategy

Value Traps vs. Bargains — How to Spot the Difference

A Sneak-Peek at 2010s Fastest-Growing Economies

The Hidden Costs of Free Credit Reports

InvestingAnswers is the only financial reference guide youll ever need. Our in-depth tools give millions of people across the globe highly detailed and thoroughly explained answers to their most important financial questions.

We provide the most comprehensive and highest quality financial dictionary on the planet, plus thousands of articles, handy calculators, and answers to common financial questions — all 100% free of charge.

Each month, more than 1 million visitors in 223 countries across the globe turn to as a trusted source of valuable information.