Reducing the vulnerability of your portfolio
Tuesday, September 9, 2014, 11:04 PM
- What you need to know about hedging with
- Inverse and leveraged ETFs
- Deciding which hedging instruments are appropriate for your portfolio
If you have not yet read Part 1: Defying Gravity available free to all readers, please click here to read it first.
OK - hedging sounds prudent. But how do you do it?
Our focus here in Part 2 of this report is to cover the most common vehicles used in hedging strategies. Each one merits its own dedicated report (a series we'll likely create in the future) to truly understand how and when to best deploy, so this report will focus on providing you with a good introduction to each, with guidance on how to further explore the ones that strike you as appropriate for your needs and personal risk tolerance.
An easy way to limit your downside on large positions in your portfolio is to set stops.
(Stops can be used on positions of any size, but you'll typically want to employ them on your largest ones first, where your exposure is greater.)
A stop order (also referred to as a "stop-loss" order) is used to trigger the sale or purchase of a stock once its price reaches a predetermined value, known as the stop price.
As an example, let's say you bought a stock for $50. You may decide you want to limit your maximum loss on the stock to 10%, so you enter a stop order for $45. Then, if the price of the stock subsequently drops below $45, your stop activates an order to sell the stock at market.
If instead of falling, the stock you buy climbs higher, your stop is not triggered and you continue owning the security.
As the name "stop-loss" implies, stops are intended to help you... » Read more