Inefficiencies in markets present opportunities -Arbitrage!
On the Money From the April 2, 2010 print edition The R&B singer Billy Preston pined in 1974, “Nothin’ from nothin’ leaves nothin’. You gotta bring me somethin’ if you wanna be with me.” If a person wanted to bring Billy “something,” but had “nothing,” what could they do? Where do any of us turn when we crave “something from nothing”? The answer? Arbitrage. Arbitrage is defined to be the simultaneous purchase and sale of a security (or anything else for that matter) in order to profit from a difference in the price. This usually takes place on separate exchanges or marketplaces. For example, if the price of a stock on the New York Stock Exchange is $10 per share, but is $8 on the Frankfurt exchange, the $2 difference could be an immediate profit requiring zero investment. How it works: The arbitrageur sells on the New York exchange while simultaneously buying on the Frankfurt exchange. Because the transactions theoretically are simultaneous, there’s an immediate gain of $2 per share. Furthermore,...
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