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What is Basket Order and How it Works?

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Trading requires commitment, time and discipline. However, placing a different order every time you want to buy or sell securities may be too time-consuming and a cumbersome process. That is where a basket order comes as a handy and swift solution. A basket order refers to a grouping of multiple securities that are traded in a single order. In this article, we will discuss in detail the basket order meaning, its benefits, disadvantages and types.

Understanding the Meaning of Basket Order

Before delving into other aspects of basket order, it is important to understand what is basket order? It is a rather simple trading technique or feature which allows investors or traders to place buy or sell multiple securities in a single order. In a way, it is like placing different stocks in a single basket and then selling or buying them in one go.

The securities picked for a basket order are usually of the same nature or share a particular criteria. For example, multiple securities linked to the energy or oil sector can be placed in a basket order. While there are risks associated with such a technique of trading, the basket order benefits are also worthwhile which include time-saving and hedge benefits.

The Importance of Basket Orders in Trading 

Now that you understand what is basket order, the next stage would be to understand the importance of basket orders in trading. Though anyone can place a basket order, it is mainly used by professional investors, institutional traders and fund managers.

Here is the list of factors that make basket orders important in trading: 

  • Simplifies trading: Basket orders lets you execute multiple trades with a single order, thus easing the trading process and saving the time taken to place individual trades.

  • Increase efficiency: Basket orders increase your efficiency as it automates the trading process and reduces the need for manual intervention, thus minimises the risk of errors.

  • Minimises costs: Since the multiple securities are traded as one investment, it reduces the brokerage commissions, trading costs and other charges.

  • Portfolio rebalancing: Basket orders ensure quick portfolio rebalancing as it enables investors to trade multiple securities in a single order.

  • Risk management: Since basket orders automatically diversify the investment portfolio and allow traders to hedge, therefore risk is managed more effectively.

How to Use Basket Order 

If you want to use basket order, here are the steps that you have to follow:

  • First you would have to research and determine which securities - whether they be shares, futures and options, or currency - you want to include in your basket. These should preferably be thematic or sectoral securities, or those which match your investment objective, so that you can trade them all together.

  • Then you would have to find the section or tool on the platform that allows users to create and place basket orders.

  • Now you will have to specify the details, like whether it’s a buy or sell order, order type, and any other necessary parameters.

  • Lastly, you will have to submit your basket order to your stockbroker.

Types of Basket Orders

The following types of basket orders can be used by investors as per their financial goals and investment objectives: 

  • Index Basket Order: This type of basket order replicates the performance of a specific index. For example, this basket order can be based on Nifty 100, or Nifty Bank, or any other index

  • Sector Basket Order: This type of basket order would let you invest in the securities of a specific sector, such as oil, energy, bank or technology. 

  • Thematic Basket Orders: This type of basket order is based on an investment theme, for example, electric vehicles, artificial intelligence, or renewable energy.

Advantages and Disadvantages of Basket Orders

Now that you have read about what is basket order, its importance and different types, below is the elaboration of the basket order benefits and disadvantages. 

Advantages of Basket Order

  • Saves Time: A basket order is of crucial importance if you have a busy schedule and cannot keep on placing individual orders. By placing a single order for a group of multiple securities, basket order saves time.

  • Minimises costs: The costs incurred are more when you will be placing individual order for each of the securities that you want to trade. Instead, a basket order costs less as transaction costs are limited.

  • Reduces Potential Errors: Placing individual orders everyday for a large set of securities can be a hectic process with a good margin of error for an incorrect order. In case of basket order, the scope for errors is greatly reduced.

Disadvantages of Basket Order

  • Limited Control: A basket order limits the control over the individual securities. In case, a particular security is doing bad or doing good, you cannot take a selective call about it. 

  • Reduced Profit: Since you are investing a group of multiple security, some of which may perform well, but some may not, so your overall profit percentage may be low.

Basket Order Use Cases in Trading  

The use cases of basket order in the trading are listed below: 

  • Institutional Investing 

Basket orders are commonly used by institutional investors such as hedge funds or mutual funds. Since these investors are engaged in large and complex trades on daily basis, basket orders become a time-saver technique for them.

  • Index Replication

Basket orders allow investors to trade the components of a market index in one go,  thus letting them customise and replicate the index. This basket order benefit lets the investor create a basket of the best of the securities in the index. 

  • Sectoral/Thematic Investing

Basket orders are popular for their ability to focus on certain sectors or themes of investments. It enables investors to have the capability to get targeted exposure by creating a basket, which also allows for spreading out of the risk.

Risk Associated with Basket Orders 

While the basket order benefits are enticing, it is important to know the risks associated with basket order. By knowing both sides of the coin, you would be able to make a more informed investment decision and pick the right investment technique that suits your investment goals. Here are the key risks that are associated with basket orders: 

Market Risk

As an investor you must understand that a basket order is not an investment product in itself, rather it is an investment strategy. The securities that are traded in the basket are always prone to market fluctuations and volatility. 

Liquidity Risk 

Since your basket order will contain different securities with different fundamentals, their liquidity will also be different. The low liquidity of some securities in your basket may become a cause of concern when you want to exit the basket.

Conclusion 

A basket order is an investment technique that lets an investor trade in a group of multiple securities with a single order. Now that you know what is basket order, you must also be aware of its advantages and disadvantages, and the benefits and risks. When you will have a comprehensive overview of this technique, you will then be able to decide whether it fits your investment objectives.

Disclaimer: Investments in the securities market are subject to market risk, read all related documents carefully before investing.

This content is for educational purposes only. Securities quoted are exemplary and not recommendatory.

For All Disclaimers Click Here: https://bit.ly/3Tcsfuc

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Frequently Asked Questions

What is a Basket Order in stock trading?

Answer Field

The basket order is the trade of a group of securities with a single order. It is different from sale and purchase of individual securities through a separate order for each of them. 

How does a Basket Order work?

Answer Field

Basket order works by placing a group of securities in a virtual basket and then asking the stockbroker to trade them as a single investment. 

What are the benefits of using a Basket Order?

Answer Field

The basket order benefits are that this technique saves time by categorising different securities as a single investment. It also provides a hedge for the investor.

Can I customize my Basket Order?

Answer Field

Yes, you can customise your basket order. The basket order lets you pick and choose different securities and place them in a single basket to be then categorised for a single trading order.

Is there a limit on the number of securities in a Basket Order?

Answer Field

Yes, there is a limit on the number of securities in a basket order.

What types of securities can be included in a Basket Order?

Answer Field

You can place a basket order for futures and options, equities, and exchange traded funds (ETFs).

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