What is Arbitrage Trading
Arbitrage Trading is the style of trading that capitalizes on short term price variations between the same stocks in different market situation to earn profit. This is carried out by buying and selling the two stocks simultaneously.
Arbitrage trading is one of the oldest and most widely used trading strategy. The simplest form of the arbitrage trading is to purchase the stock in the market where the price is lower and simultaneously selling the stock in the market where the stock’s price is higher.
Important points for Arbitrage Trading
Arbitrage Trading may occur if the following conditions are met:
• Stock price imbalance: This is the primary condition of the arbitrage. The price imbalance can be due to the following situations.
• In different market situations, the stock is traded at different prices.
• Stock with similar cash flows is trading at different prices.
• Stock with a predicted future value currently traded at a price different from the expected value of the future cash flow.
• Simultaneous trade execution: Buying and selling of the equivalent stock should be executed simultaneously to capture the price differences. If the trades are not executed simultaneously, the trade will be exposed to the risk.
Types of Arbitrage Trading
Here we have mentioned different types of arbitrage trading styles.
• Cash-futures arbitrage
• Statistical arbitrage
• Convertible arbitrage
• Dividend arbitrage
• News based arbitrage
• Financial arbitrage
• Retail arbitrage
• Risk arbitrage
Benefits of Arbitrage Trading
• Low-Risk profit- Buying or selling the stock simultaneously at low-risk to capitalize on the price variations. The trade is executed with the intention of booking a fixed profit by trading in large volume of shares.
• Safe and Swift Trades- Arbitrage trading is made safely by smart trading software that is impervious to human intervention or human error. They are short term investments with low risk and have the potential to guarantee profits.
• Reliable and sophisticated systems manage arbitrage trades- Arbitrage trading include speed, large sums of money, and huge volumes of stocks.
If you do not have any demat account and wish to open one, visit the following links.
To open your account in Zerodha
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Also Read: How to connect Zerodha Kite to Amibroker