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What are arbitrage markets?

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Posted by : NIFM
28 December, 2016, 1:52 PM
What are arbitrage markets?
What are arbitrage markets?   There are so many ways to earn money from stock market; Arbitrage is also a kind of trading which is helpful for traders. In layman’s language arbitrage is buying a stock in the market and at the same time selling in another market. Profiting from a temporary difference between buying and selling price.   It’s a risk-free trading strategy because you do trader in the same company but in different markets. Let’s take an example to understand about arbitrage. Suppose SBI share is trading at ₹270 on the NSE and on BSE it is trading at ₹272. One could simply buy SBI at ₹270 from the NSE and sell at the same time in sell SBI in the same quantity at ₹272 in the BSE.   In most equity markets, the trader can immediately claim a profit of ₹2; however, since cross-clearing has not been approved in India, the trader would need to sell the BSE shares and purchase back the NSE shares within the same day to capture the ₹2 profit.   Arbitrage can be applied to various financial instruments like currencies, shares, and commodities.   Are there any risks involved in arbitrage?   Technically, arbitrage is risks free trading strategy, although this is often not the case in practice. There is a chance that part of the transaction could fail. Suppose a trader want to arbitrage in WIPRO, he bought at 540 and a sudden price movement may make it impossible to close the trade at a profit.   "Risk" arbitrage involves a greater amount of risk as there is always a possibility that the price of an asset may not move as anticipated.   Types of arbitrage opportunities   In India, there are two types of arbitrage possible in Indian stock market.   1.      CASH-FUTURES ARBITRAGE: In cash-future arbitrage, suppose a trader bought HINDUSTAN LIVER in cash which is trading at Rs. 225 and HINDUSTAN LIVER is trading at Rs.228 in near month Futures, then the trader will buy the stock and sell the futures contract at the same time in the same qty. don’t forget, future market is a lot size associated. So the number of shares needs to be equal to the one in lots in case of HINDUSTAN LIVER lot size is 500 shares. At expiry, you can expect the price of future and the cash market to be same, and any difference you have earned would be the profit. This is also called cash and carry arbitrage.   2.      CURRENCY ARBITRAGE: In currency arbitrage, you can say it is a future to futures arbitrage between MCX-SX and NSE. When a price difference i.e. an arbitrage opportunity is found, futures contract of, for example, INR/EURO are sold in NSE at a high price and purchased in MCX-SX at a lower price.   In arbitrage, you have to take a decision quickly as the price changes every micro-second.   Arbitrage also happens in the commodity market between spot and future market and also between near month and far month contracts.   If you are a small investor, before thinking of going into arbitrage trading, make sure that you understand the concepts properly.   This is small information about arbitrage by NIFM. To learn more about arbitrage join NIFM. NIFM-a complete solution for share market courses. Call NIFM: 9910300590, www.nifm.in

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