40 Things To Know Before Entering The Stock Market

17. Arbitrage Trading

Another form of trading is called arbitrage. This process involves a shareholder buying and selling an asset to profit from a price imbalance. This type of trade will exploit price differences of similar financial instruments located in different markets.

Arbitrage is made possible because of market inefficiencies. If the stock market were perfectly balanced, arbitrage wouldn’t work. In arbitrage, the stock is bought in one market and immediately sold in a different market for a higher price. This results in the seller earning a risk-free profit. Most traders use automated trading systems to track fluctuations in the stock market.