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Hedging and speculating

Hedging is the process of removing portfolio risk. Speculating, is the process of taking on risk in the hope of making a profit.

Hedging with futures and options

Hedging is using derivative products to protect an investment. For example, if you have a portfolio of R25 000 and you are worried about the market falling in the next couple of months, you could use futures or options to hedge the portfolio. If perfectly hedged, a fall in the value of the portfolio to R20 000 (a R5 000 loss) would be offset by a R5 000 gain in the derivative, resulting in a portfolio that, overall, has not lost (or gained) anything.

Speculating

Speculating is buying shares in the hope of making a gain, but with the risk of making a loss. This typically is what an average private client is doing on the stock market, either by trading or investing.

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