Arbitrage is a trading strategy which involves the purchase... More is a The term trading strategy is used to describe a comprehensi... More which involves the purchase and resale of an to exploit short-term differences between in What is a trade order? In trading, an order can be defined... More to make a profit.
who engage in arbitrage are known as “arbitrageurs”.
How does arbitrage work?
What are value stocks? A value company is a company that app... More inefficiencies can mean that the What are value stocks? A value company is a company that app... More of an asset occasionally differs between markets. For example, it might be possible to buy an asset for a low What is price? The price is the measure of the value of good... More in one market, and then immediately sell it for a slightly higher price in another market. This is sometimes known as “pure” arbitrage.
Another type of arbitrage is “risk” arbitrage which involves a more speculative approach. For example, if it becomes known that the What are value stocks? A value company is a company that app... More are currently trading at $10, a What is a trader? A trader is a person who buys and sells... More could engage in arbitrage by purchasing shares at the lower price and selling them later (once they have reached the expected higher price), in order to make a profit.of Company A will soon be priced at $15 (after a takeover for example), but those
Arbitrage is often much more complex than this and can be applied to various financial instruments including, and .
Are there any risks involved in arbitrage?
Technically, “pure” arbitrage is said to be risk free, although this is often not the case in practice. There is a chance that part of the transaction could fail, and a sudden price movement may make it impossible to close the trade at a profit.
“Risk” arbitrage involves a greater amount of risk as there is always a possibility that the price of an asset may not move as anticipated.
Learn more about the risk associated with trading and how to properly protect your capital:
How easy is it to profit from arbitrage?
It is not easy to profit from arbitrage, especially through exploiting small discrepancies in the markets. Advances in trading technology mean that markets are monitored by automated systems, picking up any arbitrage opportunities which are then quickly exploited and subsequently eliminated.
Due to this, arbitrage is a strategy that may not necessarily suit all traders. To find the strategy that suits you best, explore our trading strategies: