In trading and investment, a basket refers to a collection of securities, such as stocks, bonds, commodities, or currencies, that are grouped together and traded as a single unit. The securities chosen in the basket usually share certain characteristics, such as them belonging to the same sector, asset class, or originating from the same location.
Baskets are often used in index-based investing. The main benefit of investing in a group of securities as one unit is convenience. Investors can easily replicate the performance of a particular sector or market by investing in a basket of securities that represent the sector or market.
Baskets of securities can also be used for diversification purposes. Investors can spread their capital across a variety of securities instead of investing in one individual security to lower investment risk.
An investor who wishes to invest in the overall development of a sector or industry can invest in a basket of securities that share this characteristic.
For example, an investor wishes to track the performance of the tech industry and invest in it. However, they do not want to invest in securities separately because of the hassle of monitoring markets and the high costs of placing multiple transactions. They can invest in a basket of tech stocks instead.
The performance of this basket of tech stocks can be measured against a benchmark index, such as the NASDAQ or the FTSE 100. The trader can then determine how well the basket does over time.
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