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Simple English definitions for legal terms
arbitrage
Read a random definition: inland
A quick definition of arbitrage:
Arbitrage is when someone buys something in one place and sells it in another place for a higher price, making a profit from the difference in price. For example, if someone buys a toy for $5 in one store and sells it for $10 in another store, they have made an arbitrage profit of $5. People can do this with stocks, currencies, and other things that have different prices in different markets.
A more thorough explanation:
Definition: Arbitrage is the practice of buying and selling the same security in different markets at the same time to make a profit from the price difference.
For example, if a stock is trading for $10 on one exchange and $12 on another exchange, an arbitrageur would buy the stock for $10 on the first exchange and sell it for $12 on the second exchange, making a profit of $2 per share.
Arbitrage can also refer to other types of trades, such as:
- Currency arbitrage: Buying a currency in one market and selling it in another to take advantage of differences in exchange rates.
- Risk arbitrage: Buying and selling assets that are probably, but not necessarily, equivalent, such as corporate stock in a potential merger or takeover.
- Time arbitrage: Buying a commodity for immediate delivery and selling it for future delivery, with the hope of profiting from the difference in prices.
Arbitrage is a common practice in financial markets and can be done by individuals or large institutions. However, it requires quick thinking and a deep understanding of market dynamics to be successful.