A Basket Trade is a financial transaction in which an investor buys or sells a group of securities simultaneously. These securities, which are often stocks, bonds, or other financial instruments, are grouped together into what is known as a “basket.”
Basket trades are typically used by institutional investors or hedge funds who want to invest in multiple assets at once to achieve specific investment goals, such as diversification or sector-specific exposure. For example, a basket trade might involve buying stocks from various companies within the same industry to gain exposure to that industry while spreading risk across multiple stocks.
Basket trades can be custom-built, where an investor selects the specific assets to include, or they can be based on a predefined index, like the S&P 500. They are often used in program trading, where large numbers of stocks are bought or sold automatically by computers based on pre-set rules or algorithms.
These trades are beneficial in scenarios where an investor wants to execute multiple trades simultaneously to avoid the risks associated with making individual trades over time, such as price fluctuations.
