DEFINITION of 'Arbitrage'

The simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms. Arbitrage exists as a result of market inefficiencies; it provides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time.


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Given the advancement in technology it has become extremely difficult to profit from mispricing in the market. Many traders have computerized trading systems set to monitor fluctuations in similar financial instruments. Any inefficient pricing setups are usually acted upon quickly and the opportunity is often eliminated in a matter of seconds.

Arbitrage is a necessary force in the financial marketplace. To understand more of this concept, read Trading The Odds With Arbitrage.

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  1. Is there a difference between financial spread betting and arbitrage?

    Financial spread betting is a type of speculation that involves a highly leveraged derivative product, whereas arbitrage ... Read Full Answer >>
  2. What is the difference between an ETF's net asset value (NAV) and its market price?

    An exchange-traded fund's market price is the price at which shares in the ETF can be bought or sold on the exchanges during ... Read Full Answer >>
  3. How is fair value calculated in the futures market?

    The fair value is the theoretical calculation of how a futures stock index contract should be valued considering the current ... Read Full Answer >>
  4. If a long call is owned on the record date of a stock, is the owner of the option ...

    The owner of a long call for a stock is entitled to a dividend only if the option is exercised prior to the ex-dividend date, ... Read Full Answer >>
  5. How did the stock market operate prior to the Securities and Exchange Commission?

    The first American stock markets were established in Philadelphia in 1790 and New York in 1792. Trading was largely dominated ... Read Full Answer >>
  6. How do interest rates impact risk aversion in the market?

    Interest rates entice savers and lenders to assume risk, allocate resources across time and affect the cost of entrepreneurial ... Read Full Answer >>
  7. If interest rate swaps are based on two companies' different outlook on interest ...

    Interest rate swaps are, at their core, a derivative instrument built on the premise of comparative advantage. To see how ... Read Full Answer >>
  8. Are there ETFs that track the drugs sector?

    There are several exchange traded funds (ETFs) that track the pharmaceutical sector. These are specialized funds that are ... Read Full Answer >>
  9. What effect has globalization had on international investments?

    Globalization has resulted in greater interconnectedness among markets around the world and increased communication and awareness ... Read Full Answer >>
  10. Is there a way to profit from arbitrage trades on delivery duty paid?

    It is not possible to profit on Delivery Duty Paid (DDP) in arbitrage trades since DDP is not bought and sold; it is just ... Read Full Answer >>
  11. Is it a good idea for a beginning investor to arbitrage the dividend calendar?

    Because of the complexity of the trading strategy that seeks to arbitrage the dividend calendar and the level of risk involved, ... Read Full Answer >>
  12. What skills should I acquire to take advantage of arbitrage trading?

    The primary skills required for an arbitrage trader are the ability to research and speculate, good risk management, observation ... Read Full Answer >>
  13. How do I use the news to find arbitrage opportunities?

    Traders can use the news to identify special arbitrage trading opportunities known as risk arbitrage. Two types of risk arbitrage ... Read Full Answer >>
  14. How do I use software to make arbitrage trades?

    Traders use software programs to detect arbitrage trading opportunities they can take advantage of for potential profits. ... Read Full Answer >>

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