A hedge is an investment made to offset the potential loss from a decline in the value of another asset. To hedge, one often takes the opposite or compensating position in a related security.
Hedging is a sophisticated method of risk management in which an investor buys or sells a financial instrument in order to offset or decrease the potential negative impact of a change in the value of their existing position.
Individual traders rarely employ hedging as a strategy; when they do, it is usually after they have already made a substantial commitment. To put it another way, you wouldn’t use hedging to begin a stock purchase.