Hedging your bets in the stock market can be risky if your goal is to make as much money as you can. What I mean by hedging is when you make bets on different things and hope that one of them pays off. You might make a bet on that home improvement show and win because you figured out a way to get more customers for your remodeling business. Or you might go with the stock market and make a good profit and then hope that the next few months will see your stocks rise. So what is hedging?
Hedging is placing your bets only on things that you can afford to lose. One way of putting it is, “I’m only in it for the big bucks, okay?” hedging one’s bets on something that would pay off if you lost it, or, more accurately, put your bets in place that will cover you if the next time you make a trade you lose it all. For example, if I’m betting on your favorite horse that will win by six points, I will put a bet in place that will cover me should you lose by six points.
But sometimes hedging isn’t about money. It’s about making yourself feel good when you make big trades. The problem is, sometimes hedging can backfire and actually hurt you. Here’s how.
Hedging can make you feel like you’ve hit the jackpot every time you bet, but you may actually have gotten in over your head with your trades. Sometimes hedging can take you out of the game and stop you from winning. When you’re playing a game like the stock market, it is very easy to lose money. This is because in the stock market you are dealing with a lot of small random numbers that are extremely random.
If you pick a winning bet, you have a very high chance of getting a very big number. However, if you choose a losing bet, you also have a very high chance of getting a big number. This means that sometimes you might be winning, but it could mean you’re losing too because you picked a big number, and that the next time you bet you make a trade, you pick a big number.
If you want to hedge your bets, you need to pick a big number. If you do this, even though you may be losing in the long run, you are at least guaranteed that you will cover yourself if your bet loses.