What Is Hedging in Stocks?

By Matthew DiLallo – Updated Feb 25, 2025 at 10:25 PM EST

Key Points

Investors hedge stocks to minimize risks via short sales, inverse ETFs, or options.
Hedging offers downside protection but involves costs such as premiums and fees.
Effective hedging is often temporary, used mainly during high-risk periods.

Hedging a stock helps reduce risk by taking an offsetting position. Investors have many ways to hedge their portfolio, including shorting stocks, buying an inverse exchange-traded fund, or using options. While hedging can reduce risk, it comes at a cost.

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stock market up and down over hundred dollar bill — Image source: Getty Images.

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Options

Stock options are contracts that give the owner the right -- but not any obligation -- to buy or sell a stock at a certain price by a certain date.

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About the Author

Matt DiLallo has been a contributing Motley Fool stock market analyst specializing in covering dividend-paying companies, particularly in the energy and REIT sectors, since 2012. He also covers pre-IPO companies, ETFs, and other investing topics. He holds an MBA from Liberty University.

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Matt DiLallo has positions in Apple and has the following options: short May 2025 $275 calls on Apple. The Motley Fool has positions in and recommends Apple. The Motley Fool has a disclosure policy.