For those who want to start investing, it is essential to understand the dynamics of the financial market . Even more so when the universe of investments has several specific terms and expressions.
Hedge is one of those terms that every investor needs to know. It will help you make investments with greater security , as it is present daily in the lives of those who want to protect their investments.
Knowing how it works is essential to have an intelligent protection strategy.
If hedge is still something unknown to you, stay here in this article to understand more about what it is and how this protection mechanism works. Check out!
What is hedge in the universe of investments?
When it comes to investment, the financial market is full of tools designed to make everything work harmoniously. Hedging is one of those instruments used with the objective of protecting an investment from the volatility of asset prices or the performance of an application.
In other words, hedging is a mechanism that protects financial operations from constant price variations in the variable income market.
In general, investors who bet on this mechanism seek to protect their investments from possible large losses.
Hedging is a strategy that can be used by any investor interested in investing their money in the stock market, to reduce the risks of investing in variable income. As well, it can be used to avoid the possible risks of fixed income investments.
Protecting your investment
Hedging strategies can be used on different types of assets. And for each of them, the operation is different. So, first, let’s introduce you to the most classic exercise hedge method: forecasting the futures market.
In this case, the strategy is to bet on assets with future prices. The idea is: even if there is a change in the future quotation, the investor’s negotiation will be with the values at that moment. In this way, you avoid suffering large losses with possible market variations.
However, for different assets the strategies are also a little different.
What are the types of hedge?
Hedge applied to commodities
The hedging strategy for commodities is one of the most common movements in the financial market. In this case, the plan is to avoid the effect of the unpredictability of supply and demand movements.
Basically, the sale of commodity production is now priced fixed, but its products are traded at futures contract values. This means that there is greater control over market variations , avoiding unpredictability.
Here, the strategy is to reduce the damage that currency fluctuations in the financial market cause to investors. In currency hedging, the value of trades are weighted in a certain currency. Thus, investments are hedged in currencies.
Hedge applied to stocks
The stock market tends to experience numerous price changes over the course of the day. Depending on the stock you are investing in, your investment could be at great financial risk.
The tactic here is as follows: stock options (a contract that allows the purchase or sale of a certain asset for a certain amount on a specific date in the future) are bought in advance.
As well as investing in indices that benefit from stock exchange movements, such as ETFs (Exchange Traded Funds) . They have their quotas traded on the floor as if they were shares, but replicate the composition of market indices such as the Ibovespa.
All this to avoid the negative effects of stock market volatility on your investments. That is, possible loss of money.
How important is it to use these strategies?
In a nutshell: heritage protection. For any intelligent investment, it is essential to think about measures that protect your investment from sudden losses.
Hedging is an important strategy, as it minimizes the financial risks of your investment, controlling the negative effects that financial market volatility can cause.
Variable income investments, in particular the stock market, generally present high risks for investors.
Even in times of market decline, the investor avoids that his financial planning is greatly affected. This brings more peace of mind, stability and security to continue operating in the market.
What does all this have to do with the Future Market?
When we talked up there about hedge operation methods, the purchase of assets with futures contracts, we are talking about this relationship.
Suppose that a commodity is quoted at R$40 between harvests. An investor wanting to guarantee that his product will be sold at the same price in the future, buys a put option worth R$40.
This means that he is making use of the price of that asset for a future purchase and sale. If up front the product suffers devaluation, the investor will be able to maintain the expected yield.
If the asset appreciates, there is the option of not selling the product at the previously established price. Giving up the put option to sell at the new price at the time.