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What is hedging?

The normal intent among the investors is to take little risk, cut the losses down and ride the profit as much as possible. Hedging is just the right strategy for such sort of investor sentiments.

The best way to understand what is hedging, is to think of it as insurance. When people decide to hedge, they are insuring themselves against a negative event. This doesn't prevent a negative event from happening, but if it does happen and you're properly hedged, the impact of the event is reduced. So, hedging occurs almost everywhere, and we see it everyday. For example, if you buy house insurance, you are hedging yourself against fires, break-ins or other unforeseen disasters.

Hedging stock is an important tool for diversifying risk by pairing the stock owned (the long position) with an appropriate short position. Thus, hedging is not about absolute return but rather the relative advantage one stock or commodity has over another. There are many ways to hedge so that profit is made not just on the long position but on the short position, as well. In addition, investors often will find cross market-hedging, using a long stock position and short a futures or commodity contract of use. Hedging is for sophisticated investors only.

Technically, to hedge you would invest in two securities with negative correlations. Of course, nothing in this world is free, so you still have to pay for this type of insurance in one form or another.



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Although some of us may fantasize about a world where profit potentials are limitless but also risk free, hedging can't help us escape the hard reality of the risk-return tradeoff. A reduction in risk will always mean a reduction in potential profits. So, hedging, for the most part, is a technique not by which you will make money but by which you can reduce potential loss. If the investment you are hedging against makes money, you will have typically reduced the profit that you could have made, and if the investment loses money, your hedge, if successful, will reduce that loss.

Types of hedge

Every types of hedge has a cost, so before you decide to use hedging, you must ask yourself if the benefits received from it justify the expense. Remember, the goal of hedging isn't to make money but to protect from losses. The cost of the hedge - whether it is the cost of an option or lost profits from being on the wrong side of a futures contract - cannot be avoided. This is the price you have to pay to avoid uncertainty.

Examples of the types of hedge include:

  1. Forward exchange contract for currencies
  2. Currency future contracts
  3. Money Market Operations for currencies
  4. Forward Exchange Contract for interest
  5. Money Market Operations for interest
  6. Future contracts for interest
This is a list of hedging strategies, grouped by category.

Financial derivatives such as call and put options

  1. Risk reversal

    : Simultaneously buying a call option and selling a put option. This has the effect of simulating being long on a stock or commodity position.
  2. Delta neutral

    : This is a market neutral position that allows a portfolio to maintain a positive cash flow by dynamically re-hedging to maintain a market neutral position. This is also a type of market neutral strategy.

We've been comparing hedging versus insurance, but we should emphasize that insurance is far more precise than hedging. With insurance, you are completely compensated for your loss (usually minus a deductible). Hedging a portfolio isn't a perfect science and things can go wrong. Although risk managers are always aiming for the perfect hedge, it is difficult to achieve in practice.


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The daytrader

  1. Opening range breakout
  2. Market timing
    To buy Satyam after it was rescued from brink of bankruptcy, you had to have huge confidence in your ability to read trends.
  3. Elliott wave trader
  4. Hedging
    1. What is hedging?
    2. How to hedge?
  5. Rules for investing
  6. Moving average
    1. MACD
    2. Stochastic oscillator
      Indicates whether market's moving to new highs, new lows or just moving nowhere.
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    For those who do not know about day trading.


What can you do with LinkedIn?

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We all want to be the go-to person with the latest news, the most intriguing viral content, or the hidden gems followers wouldn't have otherwise found. To be honest, if there were no way of earning money from blogging, there would not be millions of blogs. Easier said than done, though, right?

It actually might be easier than you think - as long as you take the right approach. There are several things that we should do in light of this information. First, let me tell you what not to do.

Don't neglect social! And to earn more, you need more traffic. By using the LinkedIn module of Get Free Followers, you can easily increase your blog's traffic and earn more from your blog's earning source.

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Suppose you have a blog about technology. You know that there are thousands of blog on same topic. To get benefit from your blog, you must compete with those blogs. But, how will you know your place in this competition? LinkedIn is ready to help you. But, you may ask, "how?" When you submit a link on LinkedIn, you can also submit it in a group.

Just find out how many LinkedIn shares other blogs get for same type of post. Compare it with your post. Try to find out, which things are missing in your post and why they are better than you. Many blogger thinks his post is the best one. But, when you will compare it with other blogs, you can know, you are wrong.

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Increase pagerank and get search engine's love

All want organic traffic or traffic from search engine. Nothing can give you massive traffic like search engine. But, it is not so easy. Your post must be on first or second page of search results which is very difficult. If you are a new blogger, go to google.com and do a search using a word of a post title from your blog. Maybe you can not see your blog easily. If you want to see your site/blog in the first page of a search results, you need a good pagerank from google.

LinkedIn is going to help you to increase your site/ blog's pagerank and bring your site/blog on the first page of search results through backlinks system.

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