Hedging in stocks is a technique investors use to reduce the risk of potential losses in their portfolios. It works by taking a second position that moves in the opposite direction of the original investment. If the main stock loses value, the hedge can help offset some or all of that loss. The primary purpose of hedging is protection rather than profit generation.

For instance, if an investor owns shares of a company and expects short-term market uncertainty, they may purchase a put option. This allows them to sell the stock at a predetermined price, limiting downside risk if the market declines. Another common approach is diversification, where investors spread their money across different industries or asset types to reduce exposure to a single risk.

Hedging can also involve financial instruments such as options, futures, or even inverse exchange-traded funds. While these strategies can help manage risk, they often come with additional costs and may limit potential gains if the market performs well.

It is important to understand that hedging does not completely remove risk; it simply minimises the impact of unfavourable price movements. Investors who use hedging effectively aim for more consistent and stable returns, especially during periods of high market volatility.