ARBITRAGE ECONOMY

You are probably hearing this term for the first time but businessmen and entrepreneurs all around the world have already shifted to this arbitrage economy.

Now, What Is Arbitrage?

‘Arbitrage is the simultaneous purchase and sale of the same asset in different markets in order to profit from tiny differences in the asset’s listed price’. In short term let’s say the price of an apple stock in London is $10 and the same stock’s price in New York is $10.5 so I bought those apple stocks at $10 from London and sold them in New York and made a $0.5 profit, now it’s a small difference but in a large quantity it can make a significant change. Arbitrage trades can be made in stocks, commodities, and currencies. Arbitrageurs are what arbitrage traders are called. They work for large institutions and trade in substantial amounts of money.

Advantages of arbitrage:

1. In the process of profit-making, arbitrage traders increase the efficiency of the financial markets. As they buy and sell the same assets at different prices it gradually narrows that difference between prices as the lower-priced assets are bid up and higher prices are sold out, thus keeping the market liquid.

2. Arbitrage can be an efficient method of money-making for investors seeking low-risk yield because yield is often small.

But to get the full advantage of arbitrage one should seek high-risk values to generate enough profit to overcome transaction fees. That’s why arbitrage is generally not used by individual investors but by hedge funds and other institutional investors capable ofhigh volumes.

Arbitrage economy for currencies:

This is a complicated example of arbitrage because in this a trader buys a currency and converts it into a second currency then converts that second currency into the third currency and in the end the third currency into the original currency. For example:

1. Let’s say I sell 1 million dollars to buy euros worth 863,110 euros

2. then I sell those 863,110 euros to buy pounds worth 591,171 pounds

3. then in the last sale those pounds for $1,001,384

4.so in the end $1,001,384 — $1,000,000 = $1,384

From these transactions, you would receive an arbitrage profit of $1,384

That’s how arbitrage marketing works, through which many small individual or institutional investors are pocketing profit by selling the same stocks, currencies, or assets at different prices in different markets. (408)

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