Overview of Portfolio Insurance

"Portfolio insurance" is a term that actually has two meanings when talking about the investment markets. Portfolio insurance can be used to hedge against risks by short selling securities. It can also refer to a type of insurance product that is available for certain brokerage accounts.

Hedging

The first meaning of "portfolio insurance" deals with the hedging of risk by short selling. Many investors will short sell stock market index futures in order to create a hedge against losses. If the value of their investments decrease, these futures will actually increase in value and offset the losses. At the same time, this tends to hold back the potential of the portfolio when investments increase in value.

Insurance

"Portfolio insurance" can also refer to an actual insurance product that is available for brokerage accounts. For example, the Securities Investor Protection Corporation offers insurance for brokerage accounts. This type of insurance can protect your account for up to $500,000. If the brokerage goes out of business or experiences certain other negative events, they will reimburse you for the money that you lost. This type of insurance does not protect you against performance losses on the investments that you choose.

blog comments powered by Disqus
Scottrade