A short guide to securing losses in the stock market

Investors who are investing in stocks for the first time may ask whether there is a way to insure the stocks to prevent losses.

Currently, buying insurance for stocks is not as easy as buying an insurance policy for your investment portfolio. However, there are some ways to ensure or hedge against stock market losses.

Diversifying your investment portfolio and taking advantage of multiple options can help prevent investors from suffering significant losses in their stocks.

diversification

To diversify your investment portfolio is to reduce your non-systematic risks by investing in various assets. Through diversification, the net loss realized by falling stock prices will balance the returns of other assets.

When adopting a diversification strategy, it is important to distribute wealth among investments with constant and fluctuating returns. As far as the stock market is concerned, safe stocks refer to stocks that do not experience price fluctuations and pay dividends. Investing in entire indexes containing many stocks, such as the Standard & Poor’s 500 Index or the Dow Jones Industrial Average, is a more effective strategy to ensure individual stock investment.

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Bonds, commodities, currencies and funds are also valuable assets for diversified investment portfolios. In particular, U.S. Treasury bonds backed by the U.S. government are regarded by the most conservative investors as the safest assets. Holding a certain percentage of a portfolio of 10- to 30-year U.S. Treasury bonds can mitigate risk-related stock market losses.

A short guide to securing losses in the stock market

Stock option

Options can be a valuable tool for hedging risks and ensuring stock losses. An option is a contract between two parties in which the buyer has the right to buy or sell stocks at an agreed price within a predetermined date.

Call options give investors the right to buy stocks at the strike price and expect the value of the stock to exceed the strike price. In contrast, put options give investors the right to sell stocks at the strike price and expect the price of the underlying stock to fall. Purchasing stock options for individual stocks is a valuable way to protect against the risk-related losses associated with volatile stocks.

Other types of options

Although stock options are a safe way to reduce investment risk, there are many different options that can provide investors with leverage and market exposure. Like stock options, index options are a kind of financial derivatives whose value comes from the relevant index. The contract owner has the right to buy or sell a basket of assets, such as the Standard & Poor’s 500 Index or the Dow Jones Industrial Average. In particular, index put options provide protection for investors in a bear market.

During a bear market, the assets in the investor’s portfolio will decrease, and index put options will generate positive returns. Like index options, ETF options provide insurance for stock investment. ETF options can replicate entire indexes or specific industries, such as energy, healthcare, and technology. Although index options are settled in cash, ETF options can be settled in the underlying asset.

Unlike index and ETF options, VIX options allow traders to speculate on market fluctuations without considering the price of the underlying instrument. As a cash-settled asset, VIX options are a good way to diversify and hedge portfolios.

Bottom line

The stock market is very unpredictable, and profits and losses are realized every day. Insuring your investment is an important means to prevent major losses.

Diversifying your stock portfolio is essential for any investor in the stock market. By diversifying the investment portfolio, investors will obtain assets that have nothing to do with the assets they currently own to balance losses. Diversification can be achieved in many ways, not just by buying various stocks. Bonds, commodities, funds, and especially options are valuable methods for insuring your stock investments.

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