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TeachMeFinance.com arbitrage -- a transaction in which an investor buys commodities, funds, mortgages, futures contracts, mortgage-backed securities or other securities in one market and simultaneously sells them in a different market in order to profit from differences in price between the two markets. another definition... Arbitrage -- A method of taking advantage of the fact that there may be different prices in different markets for identical goods such as gold, foreign exchange or commodities. Simultaneously, one buys in the lower price market and sells in the higher one. historic definition... Arbitrage -- The buying and selling of the same thing in different markets, as New York and London, for the purpose of making a profit from the difference in quotations between such markets ; said chiefly of dealings in stocks and bonds , but also of dealings in exchange. Arbitrage in stocks is bnsed and conducted on temporary differences in prices between different markets for the same stocks. In ordinary circumstances every stock has the same value in every market in which it is dealt in. When a stock is selling at a higher price in one market than in another it is sold in the market where the higher price prevails and is bought in the market where the lower price prevails. The operator relies on a return to the same price in both markets. When the equality in price is restored he closes his transaction by buying where he sold and selling where he bought. The difference in price that had existed represents his profit when the equality in price is restored and his transaction is closed. For example, if a stock is selling in one market at 100 and in another at 98 it is sold in the first market at 100 and bought in the second market at 98. If the stock in the second market advances to 100 while it remains stationary in the first market it is sold in the second market and 2 per cent is made on the transaction there, and it is bought in the first market at 100 and neither profit nor loss results from the transaction there. Or, if the stock declines to 99 in the first market and advances to 99 in the second market the closing of the transaction results in a profit of I per cent in each market or 2 per cent in the two markets. About the author Mark McCracken Author: Mark McCracken is a corporate trainer and author living in Higashi Osaka, Japan. He is the author of thousands of online articles as well as the Business English textbook, "25 Business Skills in English". Copyright © 2005 by Mark McCracken, All Rights Reserved. TeachMeFinance.com is an informational website, and should not be used as a substitute for professional financial or legal advice. TeachMeFinance.com and its owner recommend consultation with a professional financial advisor prior to any investment or financial decision. Please read our disclaimer.