We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What Is a Micro-Hedge?

Jim B.
Updated May 16, 2024
Our promise to you
SmartCapitalMind is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At SmartCapitalMind, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

A micro-hedge is a technique which allows investors to offset the risk of one particular security that they are currently holding. This is the opposite of a macro-hedge, which occurs when an investor attempts to hedge the risk associated with his or her entire portfolio. Using a micro-hedge mitigates the damage that can be done by the failure of one security, such as a single stock. Some of the strategies for micro-hedging include using derivative contracts intended to sell the security in question or buying another security that performs in an inverse relationship to the security being hedged.

All investments are accompanied by various levels of risk. When an investor comprises a well-diversified portfolio of securities, those risks can be effectively managed. There are certain times when a single security within a portfolio can be the cause of great concern. It could be because the security is a stock that is extremely costly, or because it's a security with a history of volatility. Whatever the case, a micro-hedge can be an effective way to deal with these securities.

It is important to understand that a micro-hedge is intended to mitigate the risk involved with just one security. As such, the technique cannot protect an entire portfolio. Instead, it can be used to keep a single stock or other security from causing too much of a negative impact. Micro-hedging is necessary if the investor insists on holding on to the potentially problematic stock, perhaps because of its potential or because of dividend rights or other benefits the investor possesses.

Derivatives are one way to offset risk with a micro-hedge. These contracts, which allow investors to speculate on prices of securities without actually paying the full price of buying them, can be set against the security that is the target of the hedge. For example, an option contract giving an investor the chance to sell a particular stock if it reaches a certain price can be used to protect an investor if he or she holds that stock and is fearful of a drop in price.

Another way to micro-hedge is by finding securities that work in inverse proportion to one another. This means that, as one security rises in price, another tends to drop in price. As an example, if an investor holds Stock A, and Stock B tends to move in inverse proportion to Stock A, buying Stock B is a good way to hedge Stock A. The only problem with this strategy is that it is rare that an inverse relationship can be found which can be trusted with absolute certainty.

SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Jim B.
By Jim B.
Freelance writer - Jim Beviglia has made a name for himself by writing for national publications and creating his own successful blog. His passion led to a popular book series, which has gained the attention of fans worldwide. With a background in journalism, Beviglia brings his love for storytelling to his writing career where he engages readers with his unique insights.
Discussion Comments
Jim B.
Jim B.
Freelance writer - Jim Beviglia has made a name for himself by writing for national publications and creating his own...
Learn more
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.