Insuring Your Investment by Hedging Option
What is Hedging?
Hedging is an option widely practiced by various companies, producer of commodities and many investors trading in the stock market. It is like insuring your assets against all possible loss. Suppose, you have a home which present market value is $1,00,000 and you would like protect it from any natural calamity or by human made activity like burglary, theft etc by paying a nominal annual insurance premium of $100. Thus by paying $100 only you can secure your asset worth of $100,000.
More on Hedging
Hedging is very popular to the experts and professionals. Hedging originates from the term 'Hedge'. Any method of strategy considered for reducing the possible loss comes within the term hedging. Hedging is not confined to monetary risks. Hedging activity presence in all activity of our live, like medical insurance for unforeseen medical expenses, farmer to protect his crops, an exporter to protect his material cost and so on. So hedging is a tool to attenuation risks.
Why do traders prefers hedging?
A trader prefers in hedging to protect his existing stock of a particular sector for possible loss in the market. For example trader A have 100 stocks in XYZ company whose present market price is $10, he purchased another stock of ABC company with same quantity for $8 each. If the stock price of XYZ company falls by $1 and stock price of XYZ company increase by $1, trader will incur no loss, although his investment to ABC is lesser than XYZ company.
Advice on how to handle stock future option
If you are new in the stock market and don't have sound knowledge on the stock market, hedging is risky to you. Keep in mind, it doesn't set off your option concurrently for all the time. Stock market is a game of mind. As an example - once you cut an extended option in money, if you narrow the futures option as well, except brokerage you do not lose any money. You are still in the market to pay only the brokerage. So, once you cut the money option, you have a tendency to carry the futures option, assuming that market will fall further, and you can make some profit. Therefore you keep it say for another day. If the market rebound on the next day, one rumor and you cut your short futures option. As a result you finally end up with overall loss.
Whether you earn profit or not relies upon whether you are there for the long period and at what level you get into. These need regular study of the stock market activity.
If you are a day trader only, settle your account daily, when you have earned a profit and avoid stop-loss. To act on that you shouldn't have a dual thoughts. just cut it when your stop-loss has broken or pre-FEED the stop-loss into the practice (which is possible with modern terminal or on the internet trading). On the contrary you will expose yourself a sad guy at the end of the day when stock market closes.
Hedging is an option widely practiced by various companies, producer of commodities and many investors trading in the stock market. It is like insuring your assets against all possible loss. Suppose, you have a home which present market value is $1,00,000 and you would like protect it from any natural calamity or by human made activity like burglary, theft etc by paying a nominal annual insurance premium of $100. Thus by paying $100 only you can secure your asset worth of $100,000.
More on Hedging
Hedging is very popular to the experts and professionals. Hedging originates from the term 'Hedge'. Any method of strategy considered for reducing the possible loss comes within the term hedging. Hedging is not confined to monetary risks. Hedging activity presence in all activity of our live, like medical insurance for unforeseen medical expenses, farmer to protect his crops, an exporter to protect his material cost and so on. So hedging is a tool to attenuation risks.
Why do traders prefers hedging?
A trader prefers in hedging to protect his existing stock of a particular sector for possible loss in the market. For example trader A have 100 stocks in XYZ company whose present market price is $10, he purchased another stock of ABC company with same quantity for $8 each. If the stock price of XYZ company falls by $1 and stock price of XYZ company increase by $1, trader will incur no loss, although his investment to ABC is lesser than XYZ company.
Advice on how to handle stock future option
If you are new in the stock market and don't have sound knowledge on the stock market, hedging is risky to you. Keep in mind, it doesn't set off your option concurrently for all the time. Stock market is a game of mind. As an example - once you cut an extended option in money, if you narrow the futures option as well, except brokerage you do not lose any money. You are still in the market to pay only the brokerage. So, once you cut the money option, you have a tendency to carry the futures option, assuming that market will fall further, and you can make some profit. Therefore you keep it say for another day. If the market rebound on the next day, one rumor and you cut your short futures option. As a result you finally end up with overall loss.
Whether you earn profit or not relies upon whether you are there for the long period and at what level you get into. These need regular study of the stock market activity.
If you are a day trader only, settle your account daily, when you have earned a profit and avoid stop-loss. To act on that you shouldn't have a dual thoughts. just cut it when your stop-loss has broken or pre-FEED the stop-loss into the practice (which is possible with modern terminal or on the internet trading). On the contrary you will expose yourself a sad guy at the end of the day when stock market closes.
If you visit stockmarketsreport.com you will have more knowledgeable topics on stock market. Here you will have resourceful articles to master your knowledge on the stock market.
Article Source: http://EzineArticles.com/?expert=Satyes_Mukherjee
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