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What does Arbitrage mean?

This term is used when someone profits from differences in prices and yields in two or more different markets. The simultaneous purchase and sale of an asset makes it viable to profit off of this, it exploits the price difference of identical or similar financial instruments.

The people who practice this kind of trade are called ‘arbitrageurs’, they buy currency, a commodity, security or some other financial instrument in one place and immediately sell it at another at a higher price, or to a ready buyer, this usually takes place simultaneously, the transaction not taking up more than a few seconds.

Arbitrage is a somewhat sophisticated form of risk free, non-speculative betting because it involves dealings where prices and returns are fixed, definite and known. This exists as a result of market inefficiencies and provides a mechanism to ensure that prices do not deviate substantially from a fair value for long periods at a time.

The practice of arbitrage has become more difficult given the technological advancement of recent years. Many of the traders have computerized all of their trading systems set to monitor the fluctuations that occur in similar financial instruments. Any and all inefficient pricing setups are acted upon quickly and the opportunity for arbitrage is eliminated in a matter of seconds.

Also called stoozing, this practice can be interpreted as taking out a free or low interest loan from a number of credit card companies, and depositing it in a high yield savings account, after which the arbitrageur makes the minimum payments towards the card, and pockets the difference. The people who practice this make money from the interest rate divided between the money paid and the money received, this is similar to what a bank does.
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