What is the meaning of Arbitrage in stock market ?

Definition of Arbitrage

Here A1 Intraday tips Team has explain the meaning and definition of the Arbitrage in Indian Stock Market in a very simple language.

Arbitrage is a trade where a Trader buy's the stock/shares (security) in one market and sell the same stock at same time in another market at a higher price, to get the profit with zero percentage of Risk (Risk free ). So Generally Arbitrage trading in Risk free trading in stock market.

In another very simple word the definition of Arbitrage Trading is investor simultaneous buying and selling stocks in different markets or in derivative forms to take the advantage of differing higher prices for the same stock.

How to find Arbitrage Opportunity

When Investor find the low rate for the particular security in one market and in same security find the higher rate in another market.

The Investor gets the small profit without any risk by Arbitrage trading. Mostly The Arbitrage Opportunity is available in following Securities.

• Stocks ( BSE to NSE )
  
• Commodities ( NCDEX to MCX)
  
• Interest Rate bonds
  
• Derivatives ( FNO to cash)
  
• Currency futures
  

Example of Arbitrage Trading:

The LUPIN Stock traded @ 900 in the NSE ( National Stock Exchange ) share market at 1.30 p.m. The Same stock LUPIN traded @ 910 in the BSE (Bombay Stock Exchange ) share market at 1.30 p.m.

Here Arbitrageur will get the opportunity for arbitrage trading:

The Arbitrageur will buy the 100 share of LUPIN from NSE share market @ 900 and at the same time he will sell the same stock LUPIN in BSE market @ 910.

So Arbitrageur will get the Rs. 10 PER Share ( total profit 10 x 100 =1000) profit immediately without any market fluctuating risk.

Arbitrage Formula

We explain the Arbitrage Formula in very simple way. This Formula can understand even beginners also very easily.

Arbitrage Trading = Buy the security from one market @ low price and sell the same security at higher price on same time in other market or in another segment.

Arbitrage trading profit = Sell security price value – buy the security price value

Refer the Above Arbitrage Example of a Trade in Lupin.

Arbitrage Software

To find the Arbitrage opportunity as manually is very difficult because there are so many securities available in Indian financial market e.g. there 7000 stock are available in NSE & BSE stock market, so in these all stocks find the difference stock price between NSE and BSE is not only difficult but next to impossible.

There are so many software programs available In the market. Generally Arbitrageur use software programs to find arbitrage trading opportunities they can take advantage of for potential profits.

Types of Arbitrage Software

Commonly there are three type software programs available in the market for Arbitrage Traders.

• Automatic Arbitrage trading software programs.
  
• Alert Arbitrage programs
  
• Remote Arbitrage alert Programs
  

Arbitrage Trading is the legal trading and also increase the liquidity in the market. It’s keep the balancing the security price among the all market.

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