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Arbitrage refers to the practice of simultaneously purchasing and selling the same asset in different markets to take advantage of its price discrepancies. This phenomenon exists due to market inefficiencies, and arbitrage allows traders to take advantage of and resolve them. Arbitrage can take place in any financial market, such as equities, commodities, and more.
To understand how arbitrage works, take this example: a company of a stock is trading at $30 on the London Stock Exchange (LSE). At the same time, it is also trading for $30.50 on the New York Stock Exchange (NYSE). A trader can buy the stock on the LSE and immediately sell it on the NYSE to potentially earn a profit of 5 cents per share.
With arbitrage, the price differences of assets will narrow between identical or similar assets, allowing traders to potentially make a profit while ironing out market inefficiencies. Lower-priced instruments are bided up, while higher-priced instruments are sold off. With the transactions made, arbitrage also helps to add liquidity to financial markets.
Simple arbitrage: This involves traders simultaneously buying and selling the same asset on two different exchanges.
Merger arbitrage: Merger arbitrage is often considered a hedge fund strategy. It involves the simultaneous purchasing and selling of the stock from two merging companies. As there is uncertainty regarding a deal before its completion, the stock price of the target company often sells below the acquisition price. This strategy is generally considered risky, as the deal may not be approved and is a longer-term proposition in comparison to other forms of arbitrage.
Triangular arbitrage: This is a trading strategy unique to the forex market. Triangular arbitrage involves three currency pairs, and it can be used when the currency’s exchange rates do not exactly match up, and forex traders can take advantage of their price discrepancies.
ADSS offers a range of global markets for traders, with CFD opportunities in indices, commodities, forex, equities and more. We also feature tutorials, how-to guides, and weekly webinars to help you navigate the financial markets and find better trading opportunities. You can start trading and investing online by opening a live trading or demo trading account.
Investing in CFDs involves a high degree of risk that you will lose your money due to the use of leverage, particularly in fast moving markets, where a relatively small movement in the price can lead to a proportionately larger movement in the value of your investment. This can result in loses that exceed the funds in your account. You should consider whether you understand how CFDs work and you should seek independent advice if necessary.
ADS Securities LLC (“ADSS”) is authorised and regulated by the Securities and Commodities Authority (“SCA”) in the United Arab Emirates as a trading broker for Over the Counter (“OTC”) Derivatives contracts and foreign exchange spot markets. ADSS is a limited liability company incorporated under United Arab Emirates law. The company is registered with the Department of Economic Development of Abu Dhabi (No. 1190047) and has its principal place of business at 8th Floor, CI Tower, Corniche Road, P.O. Box 93894, Abu Dhabi, United Arab Emirates.
The information presented is not directed at residents of any particular country outside the United Arab Emirates and is not intended for distribution to, or use by, any person in any country where the distribution or use is contrary to local law or regulation.
ADSS is an execution only service provider and does not provide advice. ADSS may publish general market commentary from time to time. Where it does, the material published does not constitute advice, or a solicitation, or a recommendation to a transaction in any financial instrument. ADSS accepts no responsibility for any use of the content presented and any consequences of that use. No representation or warranty is given as to the completeness of this information. Anyone acting on the information provided does so at their own risk.
