What is Arbitrageur?

Arbitrageur meaning is the official term used to define the investor that tries to use Market inefficiencies to their advantage. The market inefficiencies do not necessarily have to be about the price only. It could be the dividends, price, and regulation. However, most types of arbitrages include price only.

Usually, Arbitrageurs use these market inefficiencies by participating in several types of trades that counterbalance one another. Let’s understand the concept with an example.

Suppose an arbitrageur finds out the inconsistencies between shares listed on multiple exchange platforms. They could invest in the undervalued stocks listed on one exchange platform and short-sell the overvalued stocks on another platform. This way the arbitrageur earns profits by minimizing risks.

What does Arbitrageur Do?

There is no denying that an arbitrageur happens to be an experienced as well as a professional investor. That’s because finding the perfect arbitrage opportunity is quite difficult. Even when you manage to find such an opportunity, you have to trade as fast as possible to reap the benefits. In addition to that, an arbitrageur must have an eye for detail and they must be willing to endure all possible risks. That’s because the arbitrage opportunities are associated with significant risks. Not only are the arbitrageurs known for using the price inefficiencies to their advantage, but they play a crucial role in keeping the prices accurate.

As mentioned earlier, the primary source of Income for an arbitrageur is the market inefficiencies. This especially occurs when one asset is sold for different prices in the market. An arbitrageur uses these discrepancies in the prices of the assets to their benefit. To put it in simple terms, the arbitrageur benefits from the price inefficiencies by buying the assets at a lower price and selling them for a high rate. They keep the difference. This makes the arbitrageurs generate risk-free returns. It also equalizes the prices of the shares in the stock market.

Understanding Arbitrage Work

Arbitrage is quite a straightforward and smooth process. All that the investor has to do to enter this market is find out the assets with different prices in the stock exchange markets. They can buy these assets for a low price from one exchange and then sell them on another exchange for a high price. That’s how the arbitrageur makes money. Let’s understand it with a simple illustration.

Suppose you buy a couple of strawberries from the local grocery store at INR 400. You sell them to an expensive restaurant for INR 500. Here, the INR 100 is the amount you save from the investment. You are able to save it because of the market discrepancies in prices. Similarly, financial arbitrage takes place when the prices of the assets on different stock exchange platforms vary significantly. Here, the only downside is that the price of the financial instruments is highly likely to change every moment. So, it becomes extremely important for the individual to ensure that the transaction is executed simultaneously so that the price remains stable during the transaction.