Hedging Technique to protect our stock investments

Hedge means protection. Hedging in investment terminology means ‘A technique followed to protect the investment against the risk’ involved in stock markets.
Stock market investments are in general risky, it turns even more risky when we invest in high risk shares, derivatives etc. Hence it would be better to follow a suitable hedging technique, based on our category of risk. In general hedging includes buying other types of shares or other securities (like derivatives, gold) to protect from probable risk in our actual investment.
Below are some examples of hedging:-

-Small cap companies have high growth opportunity and when succeeded they make investors huge profits. At the same time small caps may not have strong fundamentals and compromise of high risk. So, some blue chip stocks like reliance, infosys, tata group companies etc should be bought along with small caps.

-Pharma, health care, bank and PSU stocks are hedges for high-risk reality, IT, and related service sector stocks.

-‘Options’ of derivatives segment can be used to hedge against risk of stock market fall.

-Dividend yield stocks are best for constant returns, can be hedged against non-dividend yielding active stocks.

Even though hedging technique is used to insurance our main investments; it should be carefully done, such that ‘hedging should not neutralize your profits’.
For example, consider two pharma companies, one is of manufacturing synthetic cancer treating drugs and other company which manufactures natural cancer treating agents. Now buying shares of both companies is a good example of hedging. Suppose, if popularity of synthetic agents is increasing, synthetic drug company profits and ultimately its stock prices will fall. But now we are hedged with other natural drugs company, its profits raises and risk from first company will be covered.
But here some factors are considerable:
-The net profit earned by you is almost neutral.
-Only rise in capital of sector i.e. cancer treating drugs here, only will give you good profits.
So always use ‘hedging technique for shares with the future scope of the sector rather than companies, especially if both are operating in same compotator business.

In my opinion, the best hedging tools are Derivatives (F&O) and active stocks.
Because if your main investment is one lakh, your hedging investment should be pretty less than 1 lakh, but can protect all your 1lakh. How to achieve this? Simple buying some very active stocks, options, or futures. For example, you invested 1 lakh total as long-term portfolio; buy some options or futures that profitable if stock markets fall (worth atleast 10,000). If really markets hugely fall your 1 lakh will become 50,000. than your options or futures hugely gains and may become 50,000, based on intensity of fall. so, here you successfully protected entire 1 lakh with only 10,000.


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  4. Nice post thank you for sharing above information. as the main purpose of derivative is to avoid risk in market through hedging and arbitraging. Equity tips

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  6. Reliance Communications- Moody’s revises rating to Ca from Caa1, Fitch revises rating to RD from CCC


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