What is hedging?

There are multiple asset classes that exist in the investing world, with different asset classes holding different risk and return levels. Hedging helps investors protect themselves from the financial loss due to a negative event. It is the purchase of one asset to reduce the risk of loss from another asset. It aids in limiting losses that occur due  to unforeseeable market scenarios. Investing in gold to protect against losses incurred in the equity market, is one such example. Though it is majorly used in the stock market, it happens nearly everywhere in practice. When you get homeowner’s insurance, for example, you are protecting yourself against fires, break-ins etc.