Definition
Arbitrage is the practice of buying and selling the same asset in different markets to take advantage of price discrepancies. Traders use arbitrage to earn profit with minimal risk when a security, commodity, or currency is priced differently in separate locations or platforms.
Why It Matters
Arbitrage ensures market efficiency by correcting price differences across markets. It also allows investors to earn risk-free profit, and its activity helps stabilize prices by aligning supply and demand across markets.
Example
A stock is priced at $100 on the New York Stock Exchange and $101 on a European exchange. A trader could buy the stock in New York and simultaneously sell it in Europe, earning a $1 per share profit. Large-scale arbitrage across markets helps minimize such price gaps.