What is Arbitrage?
As an early-investor, you get a lot of investment instrument to trade in. Also you get many opportunities at the beginning. In the world of investment, there are so many options, strategies, methods, and tactics that you can use to trade in stocks and securities and get benefits from them.
There are many financial instruments that you can invest in that benefit you and help you gain the maximum profit possible.
Out of all the options, strategies, methods, and tactics, arbitrage is a good alternative investment strategy.
With this strategy, the investor can earn profit but there are always risk involved with any investment strategy.
What is an Arbitrage investment strategy, the investor can buy and sell assets in different markets, so he can earn profit by taking advantage of price differences. Although the price differences are relatively small and short-lived, the investor can multiply them by a large volume and see the actual benefits impressive.
This investment strategy is useful to sophisticated investors and is usually leveraged by hedge funds. In the next point, you will find the details about what is arbitrage trading.
What is Arbitrage Trading?
Arbitrage Trading refers to buying one asset/security from a specific market and at the same time selling that asset to another market and making a profit from the difference in the prices. So the investor must know in advance what is Arbitrage Trading. Arbitrage trading can be done in stocks, currencies, and commodities. In arbitrage trading, the price does not deviate too much from its fair price. An optimistic investor with good knowledge about the market who knows what is arbitrage trading can substantially profit from the market scenario. Not only this, it becomes simple for him as all it takes is buying from one market and selling to other. Investors should know what is Arbitrage trading before starting to trade. There are potentials of arbitrage in derivatives market in India.
What are the potentials of arbitrage in derivatives market?
The Indian derivative market has great opportunities for arbitrage trading. The arbitrageurs in derivatives market and early investors can benefit from these opportunities of arbitrage in derivatives market. There are limitations with arbitrage in derivatives market as performing arbitrage is risky. However, there are some great opportunities if arbitrage is used with keeping few things in mind. Now the question arises here that if traders are free to perform arbitrage and it just takes one asset and sells it in the other market, then why do not all the traders do it? If buying one asset at a lower price and selling it at a higher price is so effective then it means the fundamental value of the asset may increase and it would all ultimately lead to misplaced or inappropriate price. So there comes the role of arbitrageurs in derivatives market.
The arbitrageurs in derivatives market
The arbitrageurs in stock market or arbitrageurs in derivatives market mean those investors who understand the market very well and try to exploit its inefficiencies. The role of arbitrageurs in derivatives market is to put the misplaced price of assets/securities back to its fundamental value. The inefficiencies in the derivative market show the limitations of arbitrage in the Indian market. The theory may seem nice that arbitrageurs in the derivatives market put the price misplaced price, but in reality, these strategies are risky and costly. So, although arbitrageurs in the derivatives market eliminate the misplaced price, the inefficiencies that existed before still exist after their role. Arbitrageurs in stock market are experienced investors who know the market and are ready to take the risk. The benefit that the arbitrageurs get is from the price differences between stock and the other assets/securities that are listed in multiple exchanges. The good thing that the arbitrageurs in stock market do is that they exploit the inefficiencies of the price in the stock market and these actions keep the prices of the assets accurate. Arbitrage trading in Indian stock market is possible if you have stocks in your Demat account.