Before you start thinking of the thick hedge that you have been manicuring around your front yard, that’s not the kind of hedging we’re talking about.

This little tidbit is about financial hedging to keep you in the know for the financial conversation you find yourself drowning in.

One of the easiest ways to understand hedging is by thinking about your car insurance. For example, I own a pretty slick Nissan Pulsar and I purchase insurance to ensure that if in the unlikely event I end up in a crash, my car is covered and the financial impact is reduced.

This is the same for hedging!

Portfolio managers and investors use a range of hedging techniques to reduce their exposure to risk. This is hedging in its simplest form, but hedging techniques can get quite complicated and strategic.

Investors use instruments in the market to offset the risk of any negative price movements. Basically, investors hedge one investment by making another.

via GIPHY