Arbitrage is an investment strategy where a trader earns profit by buying an asset at a lower price in one market and selling it at a higher price in another market at the same time.
Arbitrage takes advantage of price differences for the same asset across different markets, exchanges, or forms. Since the buy and sell happen almost simultaneously, arbitrage is considered a low-risk strategy, especially when executed efficiently.
In financial markets, arbitrage is commonly seen in:
Arbitrage opportunities usually exist for a short time because markets quickly correct price differences. Professional traders and institutional investors often use advanced systems to execute arbitrage trades rapidly.
For retail investors, arbitrage is commonly accessed through arbitrage mutual funds, which aim to generate stable returns with relatively low risk and tax efficiency.
"If a stock is trading at ₹500 on Exchange A and ₹505 on Exchange B, a trader can buy the stock at ₹500 and sell it at ₹505, earning a ₹5 profit per share through arbitrage."