Written by Upstox Desk
5 min read | Updated on July 31, 2025, 18:25 IST
Hedge meaning
What is hedging in the stock market?
Types of hedging strategies in the Equity Market
Pros of Hedging
Cons of Hedging
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Isha: Do you use an umbrella when it rains?
Shiva:Yes!
Isha: Take car insurance before driving your new car?
Shiva:Yes, of course!
Isha: Do you have a screen guard on your phone?
Shiva:Is that even a question? My phone is my life! Absolutely!
Isha: Then why don't you hedge your positions in the market?
Shiva: Hedge? What is hedging? What is hedging in trading?
A hedge refers to a way of protecting oneself against adverse circumstances. In other words, shielding oneself against loss by taking balancing or compensatory actions. A hedge is basically an insurance. The term hedging is mainly used in the field of horticulture and finance though both have very different meanings.
Hedging meaning in stock market: Hedging in the stock market refers to safeguarding one position in the market by taking another opposite position. This is done to reduce the risk of uncertainty or loss that may occur due to unfavourable price fluctuations.
Let us understand this with the help of an example. Mr. Arshdeep has taken a long position in Tata Motors and according to his analysis it will be profitable to have the share as a long-term holding. But his analysis also suggests that the price of Tata Motors might fall this month. So decides to hedge by short selling it in futures while keeping his equity position intact.
Mr. Arshdeep safeguards his long position in Tata Motors by taking another position (short selling Tata Motors Futures) with the aim of reducing the risk of uncertainty or loss that might occur due to fall in price of the stock in the short term.
As seen in the example, Futures can be used to hedge positions in the cash market. The frequently used futures hedging strategies include:
Now for those investors that don't trade in derivatives, they too can hedge by simply investing across asset classes like fixed deposits, gold, Provident funds and other debt instruments. Asset allocation strategy aims to reduce risk by diversifying the investor's portfolio. So the investor doesn't have all eggs in one basket.
Following are the reasons why hedging is needed:
So we can conclude that hedging strategies help investors to sleep peacefully at night instead of waking them up with nightmares of 'what if?'.
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Upstox Desk
Upstox Desk
Team of expert writers dedicated to providing insightful and comprehensive coverage on stock markets, economic trends, commodities, business developments, and personal finance. With a passion for delivering valuable information, the team strives to keep readers informed about the latest trends and developments in the financial world.
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