How Does Arbitrage Work ?
You might know what an arbitrage mean. In case you are not aware it is simply a kind of transaction whereby an investor buys and sells two kinds of securities at the same given point of time from different markets so that he can enjoy profits as well as unequal prices. The investor will buy the investment at a time when prices would be low and sell it at a time when they would be high. |
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Mostly arbitrages are conducted in Forex markets where a whole lot of commodities are involved and exchanged at several places. These commodities can be wheat, spices, coffee, sugar etc.
Not only are these but stocks, bonds and bills of exchange often involved. Now in technical terms it might be difficult to understand and hence we can present it in a simple form. For example you buy a commodity for $5 and sell it for $10 .you eventually made a profit of $5.Now this is your arbitrage profit. You can also do it in another form like buying a commodity when it is priced at a very low rate and selling it only at a high price. In this way you will make a good amount of profit. Now for the prices to increase and decrease you need to understand the demand and supply function and its effects on a market.
Demand would be the capability of any investor to buy a certain item. Supply can be explained as the ability of the same investor to sell it at his price. Now Forex markets totally work on units purchased and units sold. However, you need to be sure that if the demand increases the price will definitely increase and if the supply decreases the market value will also decrease. It is definitely a big gamble and involves huge amount of patience and experience and a good idea on predictions.
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