Hedging bets are a sure fire way to get rich. This is the main reason for the popularity of hedging bets. But most of us do not fully understand the meaning of hedging bets and the role that it plays in our daily life.
Hedging is an act of holding a particular position for a specific time period and offering a range of options to increase the potential profit of the buyer. The term “hedging” refers to the process of earning interest on an investment without cashing in the entire investment. In simpler terms, the person hedges his/her risk so that the amount he/she pays when the investment is cashed in will not be at a higher risk as compared to what was paid to the seller.
HEDGING BETS: The term hedging is used here to refer to the bet to hedge risks or position. Hedging bets can be made anywhere, ranging from a long term (PRA) position to a short term (PTA) position. But the general idea of hedging is to carry out a particular trade for a specific time period with a guarantee that the bet will earn interest at a certain rate, which will be greater than the usual rate of return of the market, over a specified time period.
Hedging bets are one of the safest ways to hold a position for a longer period of time. For example, in the case of a hedge bet to hold a position for a period of five years, this can mean an interest earning rate of almost 100%! This is a very attractive proposition indeed. However, it is important to note that hedging bets are just that – a risk management tool and it is only applicable when the trader is very much sure about the direction in which the market is going.
Hedging bets are often viewed by traders as a crutch for unscrupulous brokers. The entire industry is based on the contention that most traders indulge in certain forms of gamblers play and that hedging bets are used by them to channel and divert the investor’s money into their own pockets. This is really a misconception as a trader can never bet at the same time and simultaneously protect his/her investment. Also, a trader should never bet with his own money.
The major benefit of hedging a position is that the investor can control his/her risk. This enables the investor to invest in a stock which otherwise would have been impossible to invest in. This means that hedging a position would increase the chances of doubling your investment. Thus, hedging is considered to be a safe way of protecting oneself from financial loss.
When hedging a position, it is a well known principle that the risk to the investor should be reduced to the minimum possible level. Therefore, this means that the investor should pay as little as possible to the broker who offers the hedging bet. This means that the risk management strategy is based on minimizing the risk that the investor takes. However, in most cases, the hedging broker will pay a higher rate of interest than the market rates for hedging.
Hedging bets are becoming more popular with the changing environment. As the economy improves, it becomes easier for people to have the potentials of earning higher returns. Therefore, many traders prefer to take hedge bets to improve their investment strategies. In spite of all these benefits, hedging bets are considered as one of the safer form of investing and one of the safest form of hedging as well.