Investment refers to the process of buying assets with the aim of the assets increasing in value over time. As the value of the asset increases, the investor is provided with a return that takes the form of capital gains or income payments. Investment has historically always been associated with the growth of wealth and the pursuit of capital income. However, investments can also be a means to improving lives and the lives of those in your community.
What is Arbitrage?
Arbitrage is an investing strategy in which people aim to profit from varying prices for the same asset in different markets. Quick-thinking traders have always taken advantage of arbitrage opportunities in markets. Today, financial professionals use sophisticated algorithms to discover and exploit complicated arbitrage strategies.
The two types of Arbitrage investments
- Retail Arbitrage
Retail arbitrage is an example of arbitrage that everyone can instantly understand. When there’s a particularly popular item like a rare pair of sneakers or a new mobile phone. People buy it in one market, from a physical store and then sell it in another market like online, for example to turn a quick profit. This is a classic strategy that perfectly illustrates the basics of arbitrage. The buyer assumes the risks of acquiring inventory and the uncertainty of whether they’ll be able to sell it at the price they’d hoped for.
- Simple Arbitrage
Simple arbitrage involves simultaneously buying and selling one asset on two different exchanges. Unlike retail arbitrage, traders may assume very little risk because the transactions are executed at the same time. Consider, for example, a public company that trades on multiple stock exchanges. If the stock is trading at different prices on the different exchanges, a simple arbitrage strategy entails buying the stock at the lower price on one exchange while at the same time selling it at the higher price on the other exchange.
Arbitrage investments in Forex Markets
The foreign exchange market is the largest financial market in the world. What’s more, exchange rates constantly fluctuate based on supply and demand, so temporary price mismatches are common. There’s also a lot of liquidity in the currency market, meaning it’s easy to execute trades for an arbitrage strategy. All of these reasons enable arbitrage to be widely used in forex trading.
