arbitrage

ar·bi·trage   (är'bĭ-träzh')    n.  The purchase of securities on one market for immediate resale on another market in order to profit from a price discrepancy. intr.v.   ar·bi·traged, ar·bi·trag·ing, ar·bi·trag·es To be involved in arbitrage. [Middle English, arbitration, from Old French, from arbitrer, to judge, from Latin arbitrārī, to give judgment; see arbitrate.]

Main Entry:	arbitrage1
Part of Speech:	n
Definition:	the process of arbitration; decision by arbitration
Etymology:	Latin arbitrari 'to give judgment'

Arbitrage

The simultaneous purchase and selling of an asset in order to profit from a differential in the price. This usually takes place on different exchanges or marketplaces. Also known as a "riskless profit".

Investopedia Commentary

Here's an example of arbitrage: Say a domestic stock trades also on a foreign exchange in another country, where it hasn't adjusted for the constantly changing exchange rate. A trader purchases the stock where it is undervalued and short sells the stock where it is overvalued, thus profiting from the difference. Arbitrage is recommended for experienced investors only.

Related Links

Put-Call Parity and Arbitrage Opportunity
Trading the Odds with Arbitrage

See also: Arbitrage Trading Program (ATP), EMH, Exchange Rate, Futures Spread, Market Arbitrage, Risk

arbitrage

The simultaneous purchase and sale of substantially identical assets in order to profit from a price difference between the two assets. As a hypothetical example, if General Electric common stock trades at $45 on the New York Stock Exchange and at $44.50 on the Philadelphia Stock Exchange, an investor could guarantee a profit by purchasing the stock on the Philadelphia Stock Exchange and simultaneously selling the same amount of stock on the NYSE. Of course, the price difference must be sufficiently great to offset commissions. Arbitrage may be employed by using various security combinations including stock and options and convertibles and stock. See also basis trading, risk arbitrage.

Main Entry: ar·bi·trage
Pronunciation: 'är-b&-"träzh
Function: noun
Etymology: French, literally, arbitration, decision-making
1 : the purchase of a security, commodity, or foreign currency in one market for the purpose of immediately selling it at a higher price in another market
2 : the purchase of the stock of a takeover target esp. for the purpose of selling it to the raider for a profit