Arbitrage is an important concept in the world of stock trading.
It refers to the practice of buying and selling the same asset in different markets to take advantage of a price difference. For example, if the same stock is priced differently on two exchanges, an investor could potentially purchase the stock at a lower price on one exchange and sell it at a higher price on the other exchange. The resulting profit from these simultaneous transactions is known as an arbitrage profit.
Arbitrage plays a significant role in making markets more efficient as it motivates traders to eliminate price discrepancies across different markets. This process helps bring prices in different markets into equilibrium, meaning the same item should sell for approximately the same price in different markets.
So, although arbitrage can be a way to make a relatively risk-free profit, it also serves a broader economic function in balancing out price disparities. For beginners, it’s important to know that arbitrage opportunities are typically short-lived as markets correct themselves fast.
