Finance
All About Arbitrage - What is Arbitrage in Financial Terms?
Imagine an investment strategy that allows investors to take advantage of the difference in the price of a certain market or asset. In other words, the investor would profit from the discounted purchase and immediately resell of the product or share in a different market at a higher price. This investment strategy has been in practice since the concept of competing markets was first recognized. In today?s marketplace, this practice is known as arbitrage.
An arbitrageur seeks out assets that exhibit certain characteristics that indicate that the market (or markets) is compatible with sustaining a reasonable profit during the exchange. In order for this to happen, one of the following three circumstances must exist:
1. An asset with a reliable future-estimated price is currently trading at a lower price than its monetary value in a market with little or no risk.
2. An asset trades in one market considerably lower than it trades in another.
3. Two different assets are traded at varying prices although the cash flow for both assets is the same.
These conditions might seem a bit confusing to the everyday investor, however, arbitrage takes place daily in a number of circumstances that are fairly commonplace. For example, foreign money exchangers take advantage of the arbitrage between two currencies when they exchange one currency for another with international tourists.
Another common example of arbitrage is when an individual purchases a stock in a market where the stock is undervalued and turns around and sells the stock in a foreign market where the stock is priced higher. By doing this, the trader has generated a profit through the difference in the price of the two stocks.
Arbitrage occurs frequently in a variety of environments. Many businesses operate each day based solely upon its principle. Investors from both domestic markets as well as foreign markets have been taking advantage of arbitrage as an investment strategy since its popularity greatly increased during the 1980?s.
Private investors who are interested in becoming arbitrageurs must keep in mind that while this technique can be a very lucrative investment option, one of the key elements to turning a profit using this approach is the ability to make a decision quickly to purchase the stock or asset in question and then turn around and resell before the market has the opportunity to equalize (therefore reducing or even eliminating the profit margin between the two markets).
Check out http://www.bond-trading.org/ for more articles on treasury bonds and bond investors. |
Mike Singh
Tags: arbitrage in financial termsSimilar articles
A Guide to Offshore Banking
Offshore banking has often been associated with the underground economy and organized crime, via tax evasion and money laundering; however, legally, offshore banking does not prevent assets from being subject to personal income tax on interest. Read more →A Visa Gift Card Is A Thoughtful Gift
If you are considering giving a gift to a friend, neighbor, family member, or co-worker, then consider giving a gift card instead of a present. Gift cards allow recipients to choose the gift that befits them and in many cases the card can be used at many different locations, especially if it is a Visa gift card. Read more →An Introduction To ATMs
The invention of the Automated Teller Machines or ATMs have made banking more convenient as people would not have to go inside the bank and wait for tellers to help them. Read more →Applying For A Government Grant
A quick search of the online grant searches will quickly demonstrate to you how much grant money is truly available to the American public. You can find grants for virtually every type of business, field of study, or artistic endeavor. Read more →Aphorism
I'd be a bum on the street with a tin cup if the markets were always efficient.
Warren Buffett