Basket Trade Explained

Institutional traders primarily use the basket trade strategy. Large amounts of money move in and out of funds. As a result, this style of trading keeps the funds from having too much price movement. A large number of basket trades are made by buying and selling multiple stocks. Retail traders are individual traders. In other words, we’re considered retail traders. Institutional traders are companies that buy and sell stocks; or investment companies.

Retail traders, i.e. us, trade using smaller blocks of shares. Especially if we’re trading large cap stocks. We can trade options, which allows us to trade the more expensive stocks for less money.

What Is a Basket Trade?

  • What is a basket trade? It is an order to buy or sell a group of securities simultaneously. In other words, investment funds have a large amount of trades happening simultaneously. Basket trading is used by investment firms. Investing in the stock market is done by retail traders and investment firms. As a result, trading is approached differently between the two.

Institutional traders will often trade blocks of 10,000 shares or more. As a result, they put a lot more money into their trades than an individual trader. The individual trader trades in a personal account which is a lot different than a pension fund.

As a result, different types of traders trade differently. Individual traders can’t buy as many stocks as an institutional trader. However, the retail trader is in charge of their own account and how they trade it as well as what they invest in.

A BT usually holds at least 15 different stocks in it. It can also deal in commodities and currencies. As a result, any firm that offers basket trading usually has a minimum investment amount.

Are There Benefits to This Trading Style?

basket trading

A basket trade can have many benefits. In fact, as an investor you can personalize the trade. For example, if you want a basket trade that contains dividend stocks, you can specify that.

The company providing the basket trade can find a sector that has high dividend stocks. You can also research them yourself and come to your firm with a list you’d like them to buy.

As a result, you can allocate where the funds go. A basket trade distributes stocks by amount of shares, dollar amount and/or percentages. Basket trading makes allocating pretty easy for the investor.

Since it’s easy for the investor, it’s easy to control where your money goes. You can make the decision to add or remove different stocks from your basket.

Another benefit to baskets is the fact that you you can track the basket as a whole instead of individual stocks. Since there are about 15 stocks in each basket, that’s a whole lot more handy than having to check 15 stocks every time (find out when to use a stock loss vs stop limit order when trading).

Can You Basket Trade Yourself?

Basket Trading

Can an individual implement basket trading by themselves? Maybe to an extent but not in the full definition of the basket trade. Since a basket typically holds around 15 stocks, it might not be feasible for the individual.

It’s important to remember that firms also buy blocks of 10,000 shares. So 10,00 shares for 15 stocks is 150,000 shares of stocks give or take. That doesn’t take into account what kind of stocks and how much each share costs.

Penny stocks might be the only way to have 150,000 shares not need a ton of money to BT. However, that’s incredibly risky and not advised. If you as the individual want to try BT but find that it’s too expensive to go through a firm, you could try a modified version. However, you have to be diligent about checking it to make sure it’s working.

Instead of 15 stocks at 10,000 share blocks, maybe do 4 stocks in 100 share blocks. Allocate 2 of them for shares and 2 of them for options contracts. However, you need to look at the charts to make sure you’re getting good positions.

BT is used for long term investing but you still want to find good stocks with the potential for growth. Don’t buy a stock that’s overbought near resistance levels. Watching it pull back isn’t going to be fun.

The stock market trades in cycles. As a result, what goes up will come down. Hence long term investing can be a roller coaster. That’s why many people have firms watch the ups and downs for them (check out our stock market basics page if you need more help with trading).

The Bottom Line on Basket Trading

A basket trade is a long term investing strategy used by investment companies. Baskets typically hold 15 different stocks in large quantities. The reason for this is to control price fluctuations to keep a portfolio in the green.

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