Arbitrage is the practice of simultaneously buying and selling an asset in different markets to profit from a price discrepancy. It is a "risk-free" strategy in theory because the profit is locked in at the moment of the trade, though in practice, it requires extreme speed and sophisticated technology. How Arbitrage Works
: This activity actually helps the market by narrowing price gaps, eventually driving prices toward efficiency. Common Strategies arbitrage
: Betting on the success (or failure) of a corporate merger by buying the target company's stock and shorting the acquirer's stock. Arbitrage is the practice of simultaneously buying and
: A trader (often a computer) finds a price difference for the same asset on two different exchanges. Common Strategies : Betting on the success (or
While often described as "free money," several factors can erase profits:
: They buy on the cheaper exchange and simultaneously sell on the more expensive one.