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What are the Most Common Arbitrage Strategies?

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  • Written By: Luke Arthur
  • Edited By: Heather Bailey
  • Last Modified Date: 12 September 2016
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Using arbitrage strategies correctly can help an investor realize a profit with very little risk. Arbitrage is essentially taking advantage of misquotes or discrepancies in price to make a profit. An individual could get involved in basic arbitrage, stock arbitrage, index fund arbitrage, and even sports betting arbitrage.

The most basic of arbitrage strategies involves selling a product. For example, if a product is selling for $20 US Dollars (USD) in one market and sells for $15 USD in another, an individual could purchase it in the cheaper market and sell it in the more expensive one. This provides a scenario in which there is no risk and guaranteed orders for the investor. The investor can make a profit of $5 USD per transaction.

Another one of the popular arbitrage strategies is stock arbitrage. This strategy is going to involve utilizing different stock markets. For example, if the price of a stock on one market is $10 USD and $9.97 USD on another, the investor could make a profit of $.03 USD for each share of stock that he or she sells between the two. While this may seem like a small potential profit, when large volumes of shares are involved, the numbers can add up quickly.

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Index funds have also been known to get involved with arbitrage strategies. Index funds are based on a particular financial index. The fund invests only in the stocks that are presented in the financial index. When a company is removed from the index, another company is put in its place.

If an index fund company can accurately predict which companies are going to be included in the fund, it can purchase the shares of the companies in advance. When all of the other index funds hear about the companies being included in the index, they will have to purchase shares of the companies as well. When this happens, the price of the stock is going to increase because of all the buying. Investors in the index fund stand to profit from this increase because of the quick action of the fund managers.

Sports arbitrage is another one of the most popular arbitrage strategies available. This strategy involves looking for discrepancies between the major bookmakers in the sports betting industry. A better will take opposing bets from the different sports books and make a profit from the discrepancy in the odds.

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Soulfox
Post 2

@Markerrag -- true, but people have to be careful when using that strategy to turn a buck. Had a friend who spend around $5,000 purchasing items from a retailer in China because he could double his money by reselling those same items to customers in the United States.

Ah, but the products arrived and they were all defective. My friend lost $5,000 because there was nothing he could do about the Chinese company than complain. There was no legal recourse because of jurisdictional issues, see, so that anticipated profit became a significant loss.

Markerrag
Post 1

I would wager that few people have heard the term arbitrage, but everyone knows the concept well. For example, a lot of people have made very good money through online auction sites by purchasing goods inexpensively from people or copmanies in one company and have sold them at a healthy profit to consumers in another.

That's arbitrage, folks, and it has become a good way to make some extra cash -- particularly in the Internet age.

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