Can you buy insurance to mitigate the risk against a loss of investment when purchasing securities?

  • sipc.org may be worth noting for some situations. – JB King Jun 6 '14 at 23:46

Yes, you can insure against the fall in price of stock by purchasing a put option. You pay for a put and if the price of the share falls below the "strike price" of the put, then you can exercise the put. On exercise, the person who sold you the put contract agrees to buy the stock for the strike price, even though that strike price is higher than the market price. You can adjust the level of insurance by buying put options at higher or lower prices, or buying fewer put options than shares you own (leaving some shares uninsured).

Alternatively, you can minimize your risk exposure by investing in an index or other fund, which gives you partial ownership in a large number of shares. That means on any given day, lots of shares do worse and lots of shares do better. You can reduce the need for insurance by purchasing a lower-risk, lower-growth financial product.


Put options are basically this. Buying a put option gives you the right but not the obligation to sell the underlying security at a certain date for a fixed price, no matter its current market value at that time.

However, markets are largely effective, and the price of put options is such that if you bought them to cover you the whole time, you would on average pay more than you'd gain from the underlying security.

There is no such thing as a risk-free investment.

  • Of course, anytime you buy insurance you are expecting to lose money over time, on average. You are giving up expected value for a reduction of risk. – Muhd Jun 6 '14 at 22:54
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    @Muhd: the point is that the expected value which you give up is the only reason you're doing the investment in the first place. – Michael Borgwardt Jun 6 '14 at 23:10
  • Note that this is arguably the only reasonably-safe use for options, and even so should be used with care. (Trying to gamble directly in options is a good way to go broke fast.) – keshlam Jun 7 '14 at 6:08
  • "There is no such thing as a risk-free investment" - see for example en.wikipedia.org/wiki/Long-Term_Capital_Management, a company that implemented an almost risk-free investment strategy. – Steve Jessop Jun 7 '14 at 9:42
  • To extend the insurance analogy to put options: insurance with larger deductibles (e.g. car insurance, or catastrophic health care coverage) costs less; likewise put options with which are very far out of the money are cheaper (but don't protect you from small losses). – user296 Jun 10 '14 at 3:46

First off, the jargon you are looking for is a hedge. A hedge is "an investment position intended to offset potential losses/gains that may be incurred by a companion investment" (http://en.wikipedia.org/wiki/Hedge_(finance))

The other answers which point out that put options are frequently used as a hedge are correct. However there are other hedging instruments used by financial professionals to mitigate risk.

For example, suppose you would really prefer that Foo Corporation not go bankrupt -- perhaps because they own you money (because you're a bondholder) or perhaps because you own them (because you're a stockholder), or maybe you have some other reason for wanting Foo Corp to do well. To mitigate the risk of loss due to bankruptcy of Foo Corp you can buy a Credit Default Swap (http://en.wikipedia.org/wiki/Credit_default_swap). A CDS is essentially a bet that pays off if Foo Corp goes bankrupt, just as insurance on your house is a bet that pays off if your house burns down.

Finally, don't ever forget that all insurance is not just a bet that the bad thing you're insuring against is going to happen, it is also a bet that the insurer is going to pay you if that happens. If the insurer goes bankrupt at the same time as the thing you are insuring goes bad, you're potentially in big trouble.

  • ... and the reason people often neglect the risk of the insurer going bankrupt, is that if big insurance underwriters go bankrupt then everyone is in trouble regardless of what they're invested in, and the government will want to bail them out. Failing that the best investments may be canned food and medical supplies ;-) – Steve Jessop Jun 7 '14 at 9:50
  • @SteveJessop - Which is itself a bet! :) You're betting that the canned food is going to be helpful in the future and not a deadweight cost (due to the non-occurrence of TEOTWAWKI). – NL7 Jun 9 '14 at 22:13

Not that I am aware. If you are trying to mitigate losses from stock purchases, you may want to consider stock mutual funds.

This is why single stocks can be extremely risky.

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