An investment strategy that reduces the risk of adverse price movements by taking an offsetting position in a related security. Hedging provides protection against losses but typically limits potential gains as well.
From Old English 'hecg' meaning a fence or boundary made of shrubs. The financial metaphor emerged because hedging creates a protective 'fence' around investments, limiting both losses and gains just as a hedge bounds a garden.
Hedging is like buying insurance for your investments - you pay a premium (give up some upside) to protect against the downside! Airlines hedge fuel costs, farmers hedge crop prices, and smart investors hedge their portfolios because sometimes limiting your gains is worth sleeping better at night.
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