What it is:
A pairs trade occurs when an investor buys two stocks in the same industry.
How it works (Example):
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 it Matters:
Pairs trades allow investors to mitigate the effects of broad