Taking an investment position designed to reduce or eliminate potential losses from another position. A hedge is typically a defensive move that sacrifices potential profits to protect against large losses.
You own 100 shares of a stock worth $5,000 that you plan to keep long-term, but you are worried about a short-term market downturn. You buy a put option that gives you the right to sell those shares at $45 each. If the stock falls sharply, your put option protects your downside while you wait for recovery.
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