Hedging Against Everyday Expenses Using Stocks

During a visit home, while passing a gas station my father remarked "Wow, these gas prices are really going up".  After giving it some more thought, I realized that he was right.  After all, just back in December, the average price per gallon in the United States was $1.65/gallon.  (Citation)  Now consulting the same source, I see that gas on average is $2.30/gallon and rising!  Well, there is a silver lining in every cloud and this blog article will provide you with information on how to see it.

Definition of Hedge (Hedging)

In finance, a hedge is a position established in one market in an attempt to offset exposure to the price risk of an equal but opposite obligation or position in another market. (Citation)

In plain English, all it basically means is to have an equal but opposite position to offset the risk taken with an investment.  This procedure was used massively by many investment groups to short sell many stocks.  Many critics point the finger at these funds as a key contributor to the recession that is currently being experienced.  Although "hedging" takes a negative aspect in this situation, it can be used on a smaller scale to benefit the average consumer.  Let's take hedging against an everyday expense for example.  

It is a requirement that you have gas for your car.  In order to hedge against the rising gas prices, one would invest in a index or mutual fund that invests in gas and oil.  The way that the hedging process works is that as the gas prices continue to rise, the oil/gas stock would rise also allowing the owner to offset the added expense of paying more at the pump.

It is good to know, just as hedging can work for you in a positive way, the opposite can happen also.  In the case that the gas prices go down, the stock that invests in oil/gas can go down also.  Although you are paying less at the pump, there is a higher chance that the oil/gas stock will decrease in value.

Although this one particular example uses gas as a means to hedge, one can also use many different industries such as housing, groceries, technology to perform the same type of strategy.  What are some industries that you think will be good to hedge against?  Stay Disciplined!