What does 'hedging' aim to achieve?

Hedging primarily aims to offset potential losses in an investment. This strategy involves taking a position in a financial market that will counterbalance the risk of adverse price movements in another investment. For instance, if an investor holds a stock that they fear may decline in value, they might purchase options or futures contracts that would increase in value if the stock does indeed drop. Essentially, hedging acts as a form of insurance against potential losses and is a key risk management technique employed by traders and investors.

By focusing on this objective, hedging enables investors to protect their portfolios from volatility and unpredictability in the market rather than seeking to make large profits or focus solely on short-term gains. This understanding differentiates hedging from other strategies that primarily seek high returns or exclusive investments in safe assets.