What is Basket Order?
Manually executing multiple trades in a go can result in a lot of slippages and might often lead to losses in the long term. What if I told you that there is a feature which can help you place multiple orders in a single click? Well, its possible with a feature called as Basket Order.
A basket order helps you place multiple orders in the basket in a single go thus reducing execution time and slippages. You can also place buy and sell orders in a single basket order.
Imagine a basket order like your cart in a shopping complex. You put all the items in the cart and the payment for all the items is done at the end.
How to use basket orders as a trader or investor?
Now, there maybe a question, can this orders be used by both traders and investors?
Let’s suppose, you want to trade Iron condor strategy which has 4 legs. Now, executing one leg at a time might not give you ideal entry price, but loading all the 4 legs in a basket and then executing them in a single shot might give you a good entry price.
Similarly, for an investor, if you’re tracking PSU sector stocks and want to place orders in these select stocks in the sector in a single go then you can simple load all of these stocks in a basket and with a single click, buy them.
How are Basket Orders executed?
There are 2 major steps in executing a Basket Order: Parcel Order Placement & Confirmation. Let’s understand this in detail.
- Order Placement: Here, the investor selects the instruments and the number of shares for each instrument that can be included in the basket. Once the basket order is submitted, it is sent to the brokerage platform. The trading platform then directs the trades to the relevant exchanges, where the buying and selling of each instrument occur based on the investor’s instructions, completing the trade execution.
- Order Confirmation: Once the trades are completed, the investor receives a confirmation, detailing the prices and quantities of each instrument that were successfully executed.
How Basket orders help investors?
- Saves Time: Basket orders makes it wasy for traders by allowing them to place multiple orders all at once, removing the struggle of doing them one by one. This not only saves them time but also lets traders focus more on analyzing the market and spotting new opportunities.
- Supports Diversification: Another big advantage of basket orders is that they allow you to spread your investments across different securities. You lower the risk of losing money from one stock’s poor performance by doing this. This kind of diversification helps keep your returns more stable and shields your investments from market ups and downs.
- Helps with Hedging: When placing individual orders, you miss out on the benefits of hedging and have to pay the full margin upfront. But with basket orders, you can hedge your position and reduce the margin required, which frees up your capital to invest elsewhere. This way, you make the most of your funds while managing risk more efficiently. For example, let’s say you are optimistic about Nifty50 or Banknifty and decide to purchase the current month’s Futures contract. To hedge your position, you also buy a Put Option (PE). Without using a basket order, the margin required for this trade would be atleast 2.5x to 3x higher. This is because the system doesn’t recognize the hedge provided by the put option.
Use cases of Basket Orders
- Big Institutional Investors: Basket orders are used by Mutual Funds, Hedge Funds, etc to place multiple large and bulk orders all at once. This ensures a smooth execution flow and comparatilvely lesser slippages.
- Sector Investing: Basket orders are also widely used by investors who want to focus on specific sectors or investment themes. This approach allows them to gain targeted exposure by creating a basket of stocks within a particular sector or theme. While the risk is concentrated within that area, it is still spread across multiple stocks, helping to manage and distribute the overall risk.
- Index Tracking: Basket orders allow investors to buy all the components of a market index in a single transaction. This helps the portfolio closely mirror the performance of the chosen index, providing exposure to the broader market in an efficient manner.
Important points to remember
- Margin checkup: Since you’re managing several orders at once, it’s crucial to monitor your margin requirements carefully. To ensure a smooth execution of your basket, make sure that your ‘available margin’ exceeds the ‘required margin.’
- Order types: Basket orders allow you to choose between limit and market orders. Market orders will be filled right away, while limit orders will only be executed once your target price is hit.
- After market Baskets: You can create baskets even after market hours, and once created, they remain saved. This allows you to set up your basket at any time and execute it when the market opens, ensuring you’re ready to trade during market hours.
Conclusion
To sum it up, basket orders offer a smart way for both traders and investors to work more efficiently and precisely. By letting you place multiple orders at once, they cut down the time it takes to execute trades and help avoid any potential price changes that could occur when placing orders individually. This is particularly helpful in fast-moving markets. If you’re using strategies like Iron Condor, for example, basket orders allow you to set up all your positions in one go, preventing delays that could affect your entry price.
For investors, these orders are a great way to focus on specific sectors while also diversifying. By grouping stocks from a sector or theme into one order, you get targeted exposure while spreading risk across several stocks, which helps balance returns and protects against market swings.
Big players, like mutual funds and hedge funds, also make good use of basket orders. They can place large trades in one move, reducing the risk of slippage and market impact. Basket orders also make index investing easier by allowing investors to buy all the stocks in an index with one trade, ensuring the portfolio follows the index closely.
Another big plus is the reduced margin requirements, especially if you’re hedging. This frees up capital, allowing you to use it for other investments. Also, the option to set up baskets after market hours adds extra convenience since you can plan and execute your trades when the market opens.
In short, basket orders offer a practical, flexible way for traders and investors to manage their portfolios more effectively, helping them save time, manage risk, and improve their overall trading strategies.
