What is market neutral?

What is market neutral?

Market neutral is a term used to describe strategies of investing that are poised to benefit whether the market goes up or down, or even if it stays stagnant. Some professionally managed funds might take a market-neutral stance in their entirety, or investors might employ market-neutral strategies for specific parts of their portfolio.

Market Neutral means that your position as an investor is neither bearish nor bullish, and you may be able to profit whether the market moves up or down, or even if it doesn’t move at all. Options traders, for instance, have a wide variety of market-neutral positions that they can take, since profiting may depend more on the presence of volatility rather than price movement in one direction or another.

Options traders may also be neutral and collect premiums from selling options that will never be exercised if the market stays the same. Stock investors may take a market-neutral stance by combining long and short positions, known as pair trading.

Being neutral could be a hedging strategy aimed to keep your portfolio’s total value within a certain range while seeking gains above the risk-free rate, or it could be a strategy to take advantage of future price movements that are pretty sure to happen, such as after an upcoming news event, but you are unsure of which direction they will go.

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