A Hedge Short Selling and Why It Is Useful Pt.3

The key goal to hedging is a protection, different from profit orientation like speculation. People choose hedging to shield gain and mitigate losses in their portfolio. However in hedging the costs are twofold. It means that there are going to be the actual cost and opportunity cost.

The actual cost in hedging is the expenses relating to short sales or paid premium to protect the contracts. Meanwhile, in the opportunity cost there is a cap in the portfolio in case the market hikes. In a nutshell, if a 50% portfolio owns a hedged correlation with S&P 500 the index would hike 15% in a year. The portfolio on the other hand, just records around half of the gain or 7.5% of it.

It is important to know that short selling could be very expensive especially when the speculation is wrong. A trader who has done short selling can lose more than 100% of the original investment. Thus, there are pros and cons of short selling. Those who agree on the benefit of short selling argue that there are huge possibilities in getting high profits. In addition it has a small initial capital requirement. There is also a possibility of leveraged investments. The hedge could go against the other holdings.

The cons side of the debate argue that there is also an infinite potential of losses. In order to open short selling you need to have a margin account as well. This margin account does not come for free, there are certain charges for it.