Are you familiar with the term arbitrage? It is simply the process by which you make money by taking advantage of pricing differences. And there are many ways you can use arbitrage to your advantage, including the stock market.
Today we are going to look at arbitrage in detail and show you 2 simple ways you can profit from price differences in the stock market.
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Defining Arbitrage
Before we talk about how you can make money in the stock market by using arbitrage, let’s first look at a few examples to ensure you understand this concept.
A great example is with selling online and yard sales. Many people find deals at yard sales and then flip, or resell the item they just bought for a greater value. This could be done because the seller doesn’t understand the true value of the item, or because there isn’t a strong local market for the item.
For example, let’s say a person in Florida is selling a winter coat. They ask $5 for the coat. Obviously there isn’t great demand for a winter coat in Florida, so there are few buyers. But a snowbird from Maine buys the coat and when they go home, they sell it on Craigslist for $15.
This is arbitrage.
When it comes to the stock market, you can take advantage of arbitrage too. However until recently it has been difficult to do so. This is because to truly find a security that you could quickly flip due to price differences was close to impossible.
The market moves so fast, that the only ones who really can take advantage of it are the large brokerage houses and their powerful trading computers.
But nowadays, there are funds you can invest in that turn the power of arbitrage in your favor. Additionally, there is a strategy you can use to quickly profit from price differences as well. Let’s take a look at these options.
Two Ways To Make Money Using Arbitrage
#1. Mergers And Acquisitions
Nearly every day, or so it seems, there are companies agreeing to buyouts and mergers. Usually this process involves an announcement and the company who is being taken over sees their stock price catapult.
