What is a Pairs Trade?
A pairs trade occurs when an investor buys two stocks in the same industry.
How Does a Pairs Trade Work?
Let's say John Doe buysof Ford and General Motors. The tend to follow the same patterns -- they tend to rise at the same time and fall at the same time.
However, if Ford starts to rise while General Motors starts to fall, the strategy requires John to sell Ford and buy more GM. The theory is that the stocks eventually "synch up" and resume their tandem trading patterns, which means John can by buying the that is temporarily depressed (GM) and selling the stock that is temporarily peaking (Ford).
Why Does a Pairs Trade Matter?
Pairs trades allow investors to mitigate the effects of broad
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
Several years ago, the federal government rolled out legislation meant to keep Americans from stashing their cash overseas. In 2010, the...Read More →