What is Arbitrage – Arbitrage Meaning

Podcast Duration: 06:01

Hi friends and welcome to this podcast by Angel One!

Neeti ek din airport par apni flight ke liye wait kar rahi thi. She became friends with a stranger from the UK,jiska naam tha David, jo vacation ke baad ghar laut raha tha.

They started talking, aur Neeti ne David ko bataya ki usne recently ek business start kiya hai - woh doosre deshon se products India lekar aati hai, aur tax processing ke baad higher prices pe sell karti hai.

Baat cheet hote hote Neeti asked David - What do you do for a living?

David ne bataya ki woh jo kaam karta hai, its similar to what Neeti does, lekin woh stock exchanges par same kaam karta hai. Neeti was confused.

Tab David ne bataya ki woh arbitrage trading karta hai.

Neeti asked him - Why don’t you explain it to me in simpler terms?

Itne me David ki flight ka arrival announce ho gaya, and Neeti wondered - What does arbitrage mean?

In the meanwhile, hum discuss kar lete hain arbitrage ka meaning, and uske baad dekhenge ki arbitrage trading kya hoti hai. Markets ko explain karne wali theories mein kai differences hote hain. Kuch theories ye assume karke chalti hain, ki markets fully efficient hote hain.

Are you wondering ki efficiency ka is context mein kya meaning hai?

Don’t worry, let’s break it down.

Markets efficient hone ka matlab hota hai, ki kisi bhi time point par jo securities ke prices hain, woh fully updated hain. Ya fir, demand aur supply mein jo gaps create hote hain, woh instantly fill ho jaate hain.

Iska matlab ye hua, ki agar efficient markets exist karte hain, toh unme ek particular security ki price hamesha same rahegi. Lekin theory aur practice mein bahut difference hai, and markets kabhi fully efficient nahi hote.

In reality, markets mein inefficiencies kai factors se arise ho sakti hain - human emotions, bias, information availability ke varying levels, markets ki operation timings, are some factors jo markets mein inefficiencies ka source hote hain.

This is where the interesting part begins.

Because of these inefficiencies, ek security ki price different markets mein kam aur zyada ho sakti hai. Ye price differences isliye create hote hain, kyunki demand aur supply ka equilibrium create hone mein time lagta hai. In fact, ye equilibrium attain hone mein arbitrage traders ka haath bhi hota hai.

But let’s not get distracted on these tangents, pehle arbitrage ki baat complete kar lete hain.

So markets ki supply aur demand gaps fill hone mein tame lagta hai - is duration mein different markets mein same security ki price different levels par hoti hai. Although ye differences chote hote hain, but the difference does exist nonetheless. In price differences ko hi arbitrage bolte hain.

Isse aapko ek preliminary idea toh ho hi gaya hoga arbitrage trading ka, lekin ek baar detail mein dekhte hain, ki arbotrage ko exploit karke trade karna kitna feasible hai.

Arbitrage traders different markets mein same security ke price gaps ke beech trading karte hain. In trades mein transaction cost ko monitor karna bahut crucial hota hai. Ye isliye, kyunki arbitrage trading mein aksar chote margins par trading hoti hai. Transaction costs high hone se aapke trade se milne waale margin reduce ho sakte hain.

Ye toh sirf ek aspect hua arbitrage trading ka. Lekin kaunse markets mein hoti hai arbitrage trading? Chaliye dekhte hain.

Arbitrage trading ka prerequisite hai ki koi particular securities do exchanges par trade ho rahi honi chahiye. Kabhi kabhi ye do exchanges different markets mein hote hain, in which case, the exchanges should accept transactions in multiple currencies. Arbitrage trading mein price gaps short time period ke liye create hote hain. Isliye, speed of transaction aapke returns aur trade ke success ko impact kar sakti hai.

Another point to pay attention to: arbitrage trading in and of itself ek risk free strategy hai. Kai investors arbitrage trading ke liye algortihms aur automation softwares ka istemaal karte hain. Ye softwares markets ko constantly monitor karte hain, aur set rules ke according automatically trade execute karte hain. Price difference detect hone par simultaneously ek market mein short position occupy ki jaati hai aur doosre market mein buy order place kiye jaata hai.

Simple, isn’t it?

Lekin nothing is completely risk free - arbitrage trading is rule ka exception nahi hai. In arbitrage trading, the only risk is when the price gap closes - agar price gap collapse ho jaata hai, toh you have essentially lost the trade. Lekin agar aapke paas kisi stock mein delivery position hai, toh aap risk-free arbitrage trade execute kar sakte ho. Delivery position ka matlab hota hai ki aap kisi stock ko different exchange par deliver kar sakte ho.

So friends, let’s recap - market ki inefficiency se arbitrage create hota hai, which refers to price differences of a security in different markets at a point in time. Arbitrage ko exploit karke investors make profit with arbitrage trading. Ye mostly risk free hota hai, lekin it is always wise to pay attention to process inefficiencies.

While this might look complicated, arbitrage trading actually bahut hi simple process hota hai. Aap bhi arbitrage trading kar sakte ho, by closely following multiple markets.

Toh friends, aaj ke podcast mein itna hi. Angel broking ki taraf se aapko alvida, aur happy investing until we meet on our next podcast.

To learn more about trading and markets, don’t forget to visit our website www.angelone.in!