Hedging, in simple terms, means investing in different assets that don't move in the same direction, so if one investment loses value, others might gain.
Example of Hedging
The reference provides a clear example of hedging:
- Diversification: A businessman buys stocks from a hotel, a private hospital, and a chain of malls. This is hedging because these businesses are relatively unrelated. If the hotel industry suffers, the hospital and mall businesses might still perform well, offsetting the losses from the hotel stocks.
Essentially, hedging is about spreading your risk across various investments to cushion the impact of potential losses in any single area.
