Pairs Trade

AAA

DEFINITION of 'Pairs Trade'

The strategy of matching a long position with a short position in two stocks of the same sector. This creates a hedge against the sector and the overall market that the two stocks are in. The hedge created is essentially a bet that you are placing on the two stocks; the stock you are long in versus the stock you are short in.

INVESTOPEDIA EXPLAINS 'Pairs Trade'

It's the ultimate strategy for stock pickers, because stock picking is all that counts. What the actual market does won't matter (much). If the market or the sector moves in one direction or the other, the gain on the long stock is offset by a loss on the short.

RELATED TERMS
  1. Hedge Accounting

    A method of accounting where entries for the ownership of a security ...
  2. Pairing Off

    An illegal practice of a brokerage firm offsetting short and ...
  3. Long (or Long Position)

    1. The buying of a security such as a stock, commodity or currency, ...
  4. Hedge

    Making an investment to reduce the risk of adverse price movements ...
  5. Paired Shares

    The stock of two separate companies that are under the management ...
  6. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly ...
RELATED FAQS
  1. What is relative strength?

    Relative strength is a measure of the price trend of a stock or other financial instrument compared to another stock, instrument ... Read Full Answer >>
Related Articles
  1. Mutual Funds & ETFs

    An Introduction To Pairs Trading With ETFs

    This strategy can help investors reduce portfolio volatility and make money in uncertain markets.
  2. Options & Futures

    Trading The Odds With Arbitrage

    Profiting from arbitrage is not only for market makers - retail traders can find opportunity in risk arbitrage.
  3. Options & Futures

    The Secret To Finding Profit In Pairs Trading

    Read about a market-neutral trading strategy using relatively low-risk positions.
  4. Investing Basics

    Explaining Market Value of Equity

    Market value of equity is the total value of all the outstanding stock as measured in the stock market at a particular time.
  5. Investing Basics

    What is Spread?

    Spread has several slightly different meanings depending on the context. Generally, spread refers to the difference between two comparable measures.
  6. Economics

    What is the Breakeven Point?

    In general, when gains or revenue earned equals the money spent to earn the gains or revenue, you’ve hit the breakeven point.
  7. Stock Analysis

    What is the Price-to-Sales Ratio?

    The price-to-sales ratio is an indicator of the value placed on each dollar of a company’s sales or revenues.
  8. Trading Strategies

    The Top Five Stocks For Novice Swing Traders

    New to Swing Trading? Here are the top five stocks recommended for swing trading.
  9. Options & Futures

    Advantages Of Trading Futures Over Stocks

    We look at the top eight advantages of trading futures over stocks.
  10. Technical Indicators

    Strategies To Trade Volatility Effectively With VIX

    VIX offers a bird’s eye view of real-time greed and fear, while providing a snapshot of the market’s expectations for volatility in the next 30 days.

You May Also Like

Hot Definitions
  1. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  2. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  3. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  4. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  5. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  6. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
Trading Center