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A hedge is an investment position intended to offset potential losses or gains that may be incurred by a companion investment. A hedge can be constructed from many types of financial instruments, including stocks, exchange-traded funds, insurance, forward contracts, swaps, options, gambles, [1] many types of over-the-counter and derivative products, and futures contracts.
Equity market neutral: exploit differences in stock prices by being long and short in stocks within the same sector, industry, market capitalization, country, which also creates a hedge against broader market factors. Convertible arbitrage: exploit pricing inefficiencies between convertible securities and the corresponding stocks.
A hedge fund might sell short one automobile industry stock, while buying another—for example, short $1 million of DaimlerChrysler, long $1 million of Ford.With this position, any event that causes all auto industry stocks to fall will cause a profit on the DaimlerChrysler position and a matching loss on the Ford position.
Beta is the hedge ratio of an investment with respect to the stock market. For example, to hedge out the market-risk of a stock with a market beta of 2.0, an investor would short $2,000 in the stock market for every $1,000 invested in the stock. Thus insured, movements of the overall stock market no longer influence the combined position on ...
Widow-and-orphan stock: a stock that reliably provides a regular dividend while also yielding a slow but steady rise in market value over the long term. [13] Witching hour: the last hour of stock trading between 3 pm (when the bond market closes) and 4 pm EST (when the stock market closes), which can be characterized by higher-than-average ...
Proprietary trading (also known as prop trading) occurs when a trader trades stocks, bonds, currencies, commodities, their derivatives, or other financial instruments with the firm's own money (instead of using customer funds) to make a profit for itself.
In the United States and Canada a block trade is usually at least 10,000 shares of a stock or $100,000 of bonds but in practice significantly larger. [3] For instance, a hedge fund holds a large position in Company X and would like to sell it completely. If this were put into the market as a large sell order, the price would sharply drop.
For example, convertible arbitrage attempts to fully hedge fluctuations in the price of the underlying common stock. A portfolio is truly market-neutral if it exhibits zero correlation with the unwanted source of risk. [1] Market neutrality is an ideal, which is seldom possible in practice. [2]