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What is Basket Trade?

Updated on June 14, 2024 , 2880 views

Basket Trade refers to the order for simultaneously buying or selling a group of securities. This type of trading is essential for institutional investors and investment funds to hold a vast securities Portfolio in some fixed proportions.

Basket Trade

As the cash flows in and out in the fund, larger security baskets must be bought or sold at the same time to ensure that the price movements for each security do not alter the allocation of the portfolio.

Benefits of Basket Trade

Customised Choice

Investors have access to create such a basket trade that fits their investment objectives. If you are the investor seeking Income, you may create the basket trade, including only the higher-yielding dividend stocks. This basket may contain stocks from some specified sector or the one having a particular Market Capital.

More Accessible Allocation

Basket trades make it easier for investors to allocate their investments in multiple securities. The investments are mainly distributed using the money amount, share quality, or percentage weighting. Share quantity assigns a fixed and equal number of shares to the basket's each holding.

Better Control

Basket trades help investors quickly and effectively control their investments. The investors can decide on adding or removing the individual or multiple securities to the basket. Tracking the entire performance of the basket trade is also time-saving and helps investors monitor the securities and streamline the administrative process.

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Types of Baskets Traded

Apart from the basket trades, which involve purchasing the stock shares for making up an index, some baskets are also purchased for tracking currencies and commodities. A commodity basket trade may include shares tracking the Underlying commodity basket of futures contracts. They might track various commodities' movements, but a significant part is made of energy and precious metals. You can buy the ETFs tracking the commodity prices to mimic a commodity basket.

The Bottom Line

A basket trade is traded mainly by the investment funds and ETF managers who are looking to trade the stock blocks for tracking a specified index. Apart from creating basket trades by purchasing some companies' shares, you can also consider taking the commodity risk or currency. And besides allowing for customizing the investment goals with basket trades, this approach also provides diversification. Moreover, basket trades are also less volatile than owning the individual shares, thus avoiding any significant losses from any adverse market move.

All efforts have been made to ensure the information provided here is accurate. However, no guarantees are made regarding correctness of data. Please verify with scheme information document before making any investment.
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