Hedge is a investment strategy by which one can enter in an offsetting trade to minimize the risk arising due to market volatility.
Hedge is a term quite often used in the stock markets. Risk as we all know is the uncertainty of an outcome and to reduce the impact of any negative outcome we hedge. We all must have heard of insurance and may have bought one or two. Why do we buy insurance? Because, we are not sure what would happen in the near future thus, by buying insurance we are making sure that the anticipated loss would be minimized. Remember, we cannot stop the future events from occurring.
Stock market as we all know is very volatile and it is very difficult to predict the future movements of the stocks. Of course, we do forecasting however, that does not guarantee a prediction. If you own a stock and are thinking that the in future the prices are going to go down. What would you do? Sell them? If you sell them you will end up making loss. You should think of minimizing the loss by the fall in the stock price. You can minimize the loss by buying a put option (right to sell) on the stock. The put option gives you the right to sell the penny stock if the stock price falls below a particular price (called strike price).