Arbitrage explained – A no-risk strategy, or just unethical

Arbitrage is a term that carries a couple of different connotations, depending on the person who is using it. Therefore, you should have a basic understanding of both types of arbitrage, even though most purists will say that only the first definition is actually a true definition of the word.

According to the first definition, arbitrage is a type of portfolio or stock transaction that results in profit, but no risk. These transactions are hard to come by, and even when you do find one that could result in a profit, you should still be careful, because it is possible that the profit will evaporate due to fees associated with the transactions.

A common example of this is when there is a company that is trading stock on two different markets. If the price of stock on those different markets is different – even if it is only by a few pennies per share, then you can buy and sell the stock almost simultaneously to make the difference. Usually this is done if the person buying the stock has enough money to buy and then sell a lot of stock – you will need to purchase a lot of it in order to make any money.

Arbitrage in this manner is not always possible since there are occasionally fees that need to be considered. If the transaction is going to take place somewhere where there are fees assessed for each transaction, then it will be harder to make any money through arbitrage. It is important to make sure that your profit will be higher than the transaction fees.

The other type of arbitrage usually involves hedge funds, and can sometimes result in scams. Therefore, you should make sure that you pay attention to the type of transactions you’re going to be taking part in.

Unless you already have a lot of experience with the markets, then you will probably not be engaging in arbitrage on your own. However, you should have a good idea of what it is just in case you are thinking of buying into a mutual fund, or using a broker who engages in arbitrage, you should make sure that it will not be a type of arbitrage that is unethical.