What is the meaning of repurchase agreement (REPO)?

repurchase agreement (REPO) is a financial transaction in which a dealer in effect borrows money by selling securities and simultaneously agreeing to buy them back at a higher price at a later time. The dealer invests the money paid for the securities, hoping to get a higher return than he owes on his obligation to repurchase the securities. Repurchase agreements are commonly called "repos" and they function in a way similar to a secured loan with the securities serving as collateral. In a reverse repurchase agreement, the dealer in effect loans money by buying securities and agreeing to sell them back to the customer at a higher price at a later date. In either case, the difference between the bought and sold price of the securities constitutes the yield on the transaction. See: dollar reverse repurchase agreement. Also see retail repos.