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What is a Basket Trade?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 22 September 2016
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A basket trade is an investment strategy in which an investor executes an order to buy or sell a group of securities, rather than placing a series of orders to buy or sell each security individually. It is not unusual for this type of trade to involve as many as fifty different securities. A basket trade is most often employed by program traders or institutional investors, making it possible to invest greater sums of money in the management of a specific portfolio or index fund.

One of the benefits of a basket trade approach is that with one simple order it is possible to restructure a portfolio with relative ease. This can be especially helpful if the investor or the manager for an institutional investment account sees a need for immediate action regarding the securities involved. Since shifts in the value of stocks can take place in a matter of minutes, the ability to conduct this type of bulk trading can mean the difference between protecting the portfolio from a significant loss or increasing the value of that portfolio at an impressive rate.

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Another advantage has to do with tracking the performance of the securities involved in the basket. Typically, the assets acquired as part of a basket trade can be tracked as a group. This can save an investor or manager a great deal of time, while still making it possible to monitor activity on those stocks with relative ease. As a result, the manager or investor is in a position to take swift action if circumstances require him or her to do so.

In some situations, allocation of shares among the different stocks acquired in a basket trade can be automated, with the allocation using guidelines established by the buyer. This makes it easier to create the desired balance between each of the securities included in the basket, which in turn leads to an investment portfolio that is in line with the goals of the investor. Alternatively, each of the securities would have to be addressed individually, a process that would be time consuming.

A basket trade can be configured in just about any way the investor desires. It is possible to base the contents of the basket on factors like the investor’s particular investment style, filling the basket with securities that carry a relatively low degree of volatility, assets that are highly volatile, or any combination desired. The selection of stocks for the basket may be based on anticipation of an upcoming life event, or even a public event like a political election. The investor has a great deal of control when it comes to determining what stocks are involved in the basket trade, making it possible to tailor those contents to fit any purpose or desire that the investor has in mind.

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