Stock Market Glossary
Arbitrage
Low-risk profit from price differences of the same asset in different markets.
In brief: Low-risk profit from price differences of the same asset in different markets.
Meaning in practice
Arbitrage involves simultaneously buying an asset where it is cheaper and selling it where it is more expensive. In highly liquid markets, such gaps usually disappear within fractions of a second, which is why real arbitrage is now almost exclusively exploited by algorithmic trading.
Context for investors and traders
For investors, the term becomes practical in the context of objectives, time horizon, risk capacity and costs. A suitable solution can differ between two people even when they consider the same product or metric.
How to use this in practice
The term becomes practical when expressed in numbers: what is the position weight, which costs apply, what loss is possible and what role does it play in the portfolio? These questions prevent an otherwise useful product from becoming too large or being used at the wrong time.
What to keep in mind
Include taxes, spreads, product structure and personal liquidity reserves in comparisons. Historical returns and a fund’s or index’s characteristics describe the past, not a promised future result.