Arbitrage

Financial Dictionary -> Investing -> Arbitrage

Arbitrage is an economics term that refers to the buying of one item and the selling of the same item for a higher price, therefore making a profit on the difference. It is generally a frowned upon method of making money, although it happens in most markets, from consumer electronics, to financial securities, to online advertising. Somebody who takes part in arbitrage is known as an arbitrageur.

The usual method involves buying an item from one market and selling it for a higher price in a different marketplace where it is hard to determine the value. A simple example of this would be buying an ornament from a yard sale and selling it on Ebay. The two markets are completely separate and unbeknown to the seller, his ornament might be valued high on the online community. Generally those who still do yard sales aren't familiar with online auctions and would have no idea that their item could fetch more money.

A newer phenomenon in regards to arbitrage is the online advertising tools Google Adsense and Google Adwords. The arbitrage occurs when somebody advertises their website using Google Adwords and makes that money back, plus profit when somebody clicks on a Google Adsense advert on the website. The trick is to advertise cheaply but monetize with higher value Adsense ads by specifically writing web pages tailored to expensive ads.

In the trading of financial securities, it has become a lot more difficult to conduct arbitrage as the advancement of computers and the internet makes it a lot easier to do comparisons of the market and a lot of trading statistics are in real time, removing discrepancies.

There is often risk associated with arbitrage in that markets change, and the value may end up dropping if the transactions don't happen in a short amount of time.