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Advanced StrategiesUnderstanding Penny Stocks

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Hedging

Hedging can involve diversification through accumulation of opposing investments.

So, what the heck does that mean? Well, say you buy into a sector or type of stock that acts in opposition to your current stock holdings, in order to reduce your overall risk. You have just hedged.

Here is another example, which I believe will be even more clear. Let's say you have holdings in a transportation company that can see their profit margins disappear when fuel prices rise. You may then want to buy shares in an oil production company that benefits from higher fuel prices. The two will act in opposite directions to some degree. If the price of oil rises, hurting your transport stock, you will at least have gains in your oil stock to offset these.

Transportation and oil production companies make an excellent hedge complement.

We encourage hedging for traders with larger portfolios (ie- $10,000 and more) when it makes sense to the individual, although it is by no means necessary. Hedging enables penny stock traders to reduce risk while diversifying their exposure.

Examples of Hedging
In this situation	You could hedge by
You are concerned about the future of a company in which you hold shares	Buy stock in a direct competitor
Your transport stock shares always do poorly when fuel prices increase	Take up a position in an oil production company
Your biotech shares are a long-shot: They are looking for a cure for breast cancer	If they are not successful, buying stock in a breast cancer treatment company will help cover the bases. If the biotech company is successful, their stock increase will far outweigh any losses you took on the treatment stock, whose shares would slump once the cure was verified

Hedging is an infinitely more complicated topic as it applies to conventional investments and to option strategies, but for the purposes of Understanding Penny Stocks I will only be introducing the concept.

Hedging can take so many different forms and be used for so many different purposes that it could be a book in itself. (Hey, that gives me an idea!)

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