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An investment strategy in which one owns two stocks in the same industry. In general, these stocks follow the same pattern; that is, both go up or both go down. When the pattern diverges (that is, when one increases in price and the other decreases), the investor sells the stock that has increased and buys the stock that has decreased. The idea behind a pairs trade is that the stocks will generally meet back in the middle, allowing the investor to profit from the purchase of the stock that had decreased and the sale of the one that had increased.
An investment strategy that matches a short position with a comparable long position in the stock of a company in the same industry. For example, an investor might buy 500 shares of Delta Airlines and sell short a comparable principal amount of the stock of UAL, Inc. The offsetting positions allow an investor to attempt to profit by selecting the best value in an industry without worrying about changes in the valuation of the sector or the overall market.