What is the definition of arbitrage? What exactly does arbitrage mean?

Arbitrage, as it applies to the stock market, occurs when a security is purchased on one market and immediately resold on another to take advantage of a discrepancy in the prices.

Lets take a real-life example to demonstrate exactly what arbitrage is.

Example: You swing by your local comic book store and notice that there is a mint version of the first ever Spiderman comic available for purchase for $5,000.

You drive to a second comic book store in town and talk to the manager of the store.

He informs you that he will purchase a mint-condition, Spiderman 1 for $5,500.

You purchase the comic at Store 1 for $5,000, only to immediately walk down the street and sell out to Store 2 for $5,500.

This is arbitrage. This was a zero-risk transaction for you. You took advantage of a pricing discrepancy to bank an immediate short-term profit that technically held zero risk for you.

You didnt care at all about the true value of the Spiderman comic book, and you certainly had no intention of holding on to it. You simply took advantage of the fact that Store 2 was willing to pay more for the comic than what Store 1 was selling it for.

Was Store 1 pricing the comic too low? Was Store 2 willing to pay too much for the comic? This is irrelevant to you, as you booked your profit with zero risk.

Citadels Kensington Global Strategies Fund, Wellington LLC Fund Have Their Counterparty Credit Ratings Cut by S&P

Adsense Arbitrage – What is It, and Why Doesnt Google Like It?

Google Cracking Down on Non-Compliant Adsense Sites?

Historical Unemployment Rates in the United States

A History of Bank Failures in the United States

Why Would Interest Rates Drop in the United States If The Economy is So Strong?

What is An Inverted Yield Curve and Why Does It Matter?

What Were The Three Biggest Blowouts in The History of the US Presidential Elections?

What Were The Closest Presidential Elections in US History?

Why Is The Vancouver Real Estate Market Collapsing?

How Do Calls and Puts Work in the Stock Market?

What is the Difference Between On-Budget and Off-Budget When It Comes to the US Deficit?