Arbitrage is done my big financial institutions. It is simultaneous selling and buying of two similar financial products to take benefit of difference in prices.
Though arbitrage is no more popular now, it was very popular a few years ago. Trading volumes were less so arbitrageurs took a lot of benefit. However now trading volumes have increased and there are a lot of systems that make sure there is not too much volatility in markets.
But still arbitrageurs exist.
Some traders use automated trading systems to arbitrage.
One Simple Arbitrage example – This is called Pairs Trading
A trader can buy one stock and at the same time sell one stock from the same business sector. If one side move comes more in that sector the arbitrageur can make money. However this is very risky due to the nature of stock markets.
Earlier it was not that hard because stocks of the same business sector used to move in same direction, however now stocks at company dependent not sector specific dependent.
One Example of Risky Arbitrage
Acquisition of one company of another company is very common. This news is open to all and is known sometimes 30 days before the actual acquisition actually takes place. Suppose news has come that company A will acquire company B, then arbitrageurs will buy stocks of company B and sell stock of company A. This is very risky arbitrage strategy but there are people who try it.
Selling in One Exchange and Buying in Another
This can be done my institutional investors only who have the right to sell or buy the same stock at different exchanges.
Suppose a company stock is listed in New York Stock Exchange (NYSE) and also in London Stock Exchange (LSE). Now because of different demand and supply, prices can be different in different markets. Let say company A is 45 in NYSE but 46 in LSE then an arbitrageur will sell in one stock market and buy same number of shares in another. After sometime one will give profit.
But they need to enter large positions to make huge gains.
Please note that earlier not many traders had the software or technology to know these arbitrage opportunities but in this modern world there are technologies, media, software etc that almost everyone has access to. Therefore these arbitrage opportunities are no longer available. Still arbitrageurs exist and try to take benefit.
You Can Read More On My Site
TheOptionCourse.com Copyright @ All Rights Reserved
Dilip Shaw, Founder
Copyright Infringement: Any act of copying, reproducing or distributing any content in the site or newsletters, whether wholly or in part, for any purpose without my permission is strictly prohibited and shall be deemed to be copyright infringement.
INCOME DISCLAIMER: Any references in this site of income made by the traders are given to me by them either through Email or WhatsApp as a Thank You message. However every trade depends on the trader and his level of risk taking capability, knowledge and experience. Moreover stock market investments and trading are subject to market risks. Therefore there is no guarantee that everyone will achieve the same or similar results. My aim is to make you a better & disciplined trader with the stock trading and investing education and strategies you get from this website.
DISCLAIMER: I am NOT an Investment Adviser (IA). I am an Authorized Person (AP) of a Stock Broker. In other words I am a sub-broker. I DO NOT give tips or advisory services by SMS, Email, or WhatsApp or any other forms of social media. I strictly adhere to laws of my country. I only offer education for free on finance, risk management & investments in stock markets through the articles in this website. You must consult an authorized Investment Adviser (IA) or do thorough research before investing in any stock or derivative using any strategy given in this website. I am not responsible for any investment decision you take after reading any article in this website. Click here to read the disclaimer in full.