One trade that involves a basket of securities (or derivative instruments). In other words, it initiates based on instructions for the simultaneous purchase or sale of a basket of securities / instruments, as a single unit (multiple deals effected at one time). Basket trades are often used by institutional investors and hedge funds for time and cost considerations- i.e., a single transaction for which a single commission is paid. Such investors resorts to basket trades for arbitrage and program trading. Retail brokers may also offer basket trade processing to retail clients, using a direct access trading platform.
Basket trading allows investors to target a specific sector, or a type of security like high dividend stocks, or specific asset classes including currencies, commodities, and bonds.
In addition to time and cost savings, basket trades come with other benefits including diversification and volatility reduction (reducing the volatility arising from investing in individual securities.)
A basket trade is also known as a basket order.
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