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.

BREAKING DOWN '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. Equity Market Neutral

    A hedge fund strategy that seeks to exploit differences in stock ...
  2. Short Hedge

    An investment strategy that is focused on mitigating a risk that ...
  3. Cross Hedge

    The act of hedging ones position by taking an offsetting position ...
  4. Selling Hedge

    A hedging strategy with which the sale of futures contracts are ...
  5. Hedge Fund

    An aggressively managed portfolio of investments that uses leveraged, ...
  6. Long/Short Equity

    An investing strategy of taking long positions in stocks that ...
Related Articles
  1. Financial Advisor

    Top-Down Analysis: Finding The Right Stocks And Sectors

    The top-down investment strategy depends on economy and market strength. Find out what you should know before jumping in.
  2. Investing

    Hedging Risk for Beginners: How and When to Do It

    Hedging risk is always a good idea. Here is how sophisticated investors go about it.
  3. Investing

    Hedging With Puts And Calls

    This trading strategy can reduce your risk - but only if you use it effectively.
  4. Investing

    For Maximum Market Returns, Get Creative With Hedges

    Proper hedges help to contain your losses while still allowing profits to grow.
  5. Financial Advisor

    Why You Should Never Short a Stock

    Short selling a stock means you are betting on the stock decreasing in price. Before taking on this investment, you should fully understand the risks
  6. Investing

    A Beginner's Guide To Hedging

    Hedging is a practice every investor should know about.
  7. Insights

    3 Ways To Tell If Your Stock Has Bottomed

    No one can call stock bottoms with absolute certainty, but there are some common trends that appear when stocks are about to hit bottom.
  8. Trading

    Hedging Basics: What Is A Hedge?

    This strategy is widely misunderstood, but it's not as complicated as you may think.
  9. Trading

    A Beginner's Guide To Hedging

    Learn how investors use strategies to reduce the impact of negative events on investments.
RELATED FAQS
  1. How can I use equity options to protect my stock portfolio from downturns?

    Learn about stock options, how to use them to hedge stock positions and how they could help to protect stock portfolios from ... Read Answer >>
  2. What's the difference between a long and short position in the market?

    Understand long and short positions for stocks and option contracts; combine long and short positions for added leverage ... Read Answer >>
  3. How do hedge funds use short selling?

    Learn how hedge funds use short selling to profit from stocks that are falling in price. Explore different analytical techniques ... Read Answer >>
  4. Can a stock lose all its value? How would this affect a long or short position?

    The answer to the first part of this question is pretty straightforward: yes, stocks are able to lose all their value in ... Read Answer >>
  5. What techniques are most useful for hedging exposure to the telecommunications sector?

    Learn about option strategies used to hedge a long stock position in the telecommunications sector, including bear put spreads ... Read Answer >>
  6. What is a cross hedge?

    Cross hedging is when you hedge a position by investing in two positively correlated securities or securities that have similar ... Read Answer >>
Hot Definitions
  1. IRS Publication 970

    A document published by the Internal Revenue Service (IRS) that provides information on tax benefits available to students ...
  2. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  3. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  4. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  5. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  6. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
Trading Center