What Is Arbitrage?
Arbitrage is a trading strategy that involves taking advantage of price discrepancies in different markets. It is used by traders to make profits from the difference between two or more prices for an asset, such as stocks, bonds, commodities and currencies. The goal of arbitrage is to buy low in one market and sell high in another at the same time. This type of trading can be done on both traditional exchanges and over-the-counter (OTC) markets.
The most common form of arbitrage involves buying assets when they are undervalued in one market and selling them when they are overvalued in another market. For example, if a stock trades at $50 per share on one exchange but only $45 per share on another exchange then an investor could purchase shares on the cheaper exchange and immediately sell them for a profit on the other exchange without ever having to own any physical shares. Arbitrage opportunities exist because there will always be differences between prices due to supply/demand imbalances or mispricing errors across different markets.