What Is Hedging in Trading? Simple Explanation for Beginners
A hedge is a trade that protects you against losses on another position. Like insurance: if your main position loses, the hedge partly offsets it.
How a hedge works
Example. You hold $1000 worth of coins and don't want to sell them, but you're worried about a drop in the coming weeks. You open a short on futures for the same amount. If the price falls, the gain on the short will partly cover the loss on the coins. If it rises, it works the other way around.
What people hedge with
| Instrument | How it protects |
|---|---|
| A short on futures | Gains when the price falls |
| A put option | The right to sell at a price known in advance |
| Stablecoins, bonds | Part of the portfolio depends less on the market |
| Different asset classes | A drop in one is softened by another |
On options, see options explained simply, and on asset allocation, see diversification.
What to know
- A hedge costs money: fees, funding, the option premium.
- It reduces not only your loss but also your potential gain.
- A leveraged hedge carries its own liquidation risk.
- For beginners, it's easier to protect yourself with a stop-loss and position size.
Aspiro Invest — a medium-term portfolio: what to hold, when to review it and where the protective levels are.
- A hedge is an opposite position that protects against a loss.
- It costs money and reduces potential gains.
- For beginners, a stop-loss and diversification are simpler.
Frequently asked questions
Are a hedge and a stop-loss the same thing?
No. A stop closes the position, while a hedge keeps it open and adds an opposite trade.
Does an ordinary investor need a hedge?
Usually not. For a long horizon, diversification and sensible position sizes are typically enough.
What is a hedge fund?
An investment fund for large investors that uses complex strategies. The name historically comes from hedging.
Free Aspiro Academy
26 lessons on investing and trading from scratch: videos, practice in the Aspiro apps, quizzes and a certificate. Lesson texts are open without sign-up.