arbitrage
The simultaneous buying and selling of an asset in different markets to profit from a price difference.
Example
“The trader used arbitrage to buy gold cheaply in London and sell it at a higher price in New York.”
Memory Tip
Arbi-TRAGE — think 'triage,' sorting through markets to find the best price.
Why It Matters
Arbitrage is the mechanism that keeps prices efficient across markets. When price gaps exist arbitrageurs rush in to exploit them closing the gap almost instantly. Understanding arbitrage explains why the same stock rarely trades at different prices on different exchanges simultaneously.
Common Misconception
People often think arbitrage is risk-free profit that anyone can exploit. In practice true arbitrage opportunities disappear in milliseconds and require sophisticated technology and significant capital. What retail investors call arbitrage usually involves real risk.
In Practice
A classic example is currency arbitrage: if one dollar buys 0.92 euros in New York and 0.93 euros in London a trader can buy euros in New York and sell them in London for a tiny profit. Multiply this by millions of dollars and it adds up quickly until other traders spot the same gap and close it.
Etymology
From French 'arbitrer' meaning 'to judge' — originally referred to settling disputes, later to exploiting price discrepancies.
Common Misspellings
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Related Terms
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See Also
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