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The Secrets of Arbitrage Investing

Aug 17, 2007
Arbitrage, in other words is a method to exploit the price differential in a financial deal. Arbitrage involves deep observation of different forms of investment on a continued basis to check and monitor prices, so that the investor, dealer or manager can take advantage of buying from the cheaper source and sell to others offering a higher price. For example, if the price of a stock A was $50 per share on X exchange and same stock value was on Y exchange $42, the dealer or investor can purchase the stock A from Y exchange put it up for sale on the X exchange thus making a $8 profit on each piece of stock.

Arbitrage has been quite popular a few years back. The word "Arbitrage", however, is not used very commonly as it was. Today, arbitrage exists in more varied and refined forms like hedge funds. Hedge funds use arbitrage as one of their investment strategies and are one of the largest and fastest growing investment methodologies world-wide. Arbitrage is most commonly followed at the root level today by most stock and commodity exchange dealers and investors.

Meanwhile, the original arbitrage investing has turned a new leaf and has spread its tentacles into various other forms of financial investing - Merger and Acquisitions, Sports arbitrage and others. Merger and acquisitions arbitrage deals in acquiring sick or financially weak companies in order to sell them off later at a lump-sum profit. This could either happen when the markets are in a better position or the marketability of the said company increases due to a rise in its product demand. Depending on the infrastructure, methodology, management style, strategic management, leveraging etc., the potential rewards can be substantial, but so can the risks.

Sports arbitrage is a relatively new concept that deals in "surebetting" used by the sports book makers to book profits through differences in odds of betting. This works by placing opposite bets with two different bookmakers with different odds, so that the a WIN-WIN situation arises irrespective of the outcome.

Not all arbitrage investments are the same just like any other asset class, it is strongly suggested that anyone considering this should use their own due diligence or seek a professional's advice. For example, the most common form of making money on the internet is to buy goods at online garage sales, flea markets or seconds and selling them on e-bay. It is not easy but many are playing this arbitrage game on a daily basis by exploiting products image as well as the price differential arbitrage and making a handsome profit. There is nothing wrong with this because it all boils down to supply and demand. People are looking to buy these products and the sellers are supplying.

The term "arbitrage" may not be in vogue today due to a few long-term capitalization scandals that happened in the past. Arbitrage has always been here, in various forms and it is here to stay today in the form of hedge funds. Arbitrage investing is still one of the best forms of making money - online or offline.
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