At the moment, there are many ways to make a profit in the stock or foreign exchange market. You can derive income through regular targeting, which is what they do most often, but there is a more rational, profitable and risk-free option - an arbitrage transaction. Some traders call this way of earning exchange speculation.
Definition of Arbitration Transactions
Such actions play a huge role: they normalize the exchange rate in time and space. Their main goal is to get maximum profit with minimal risk.
An arbitration transaction is a transaction that may be carried out with the same assets, but in different markets. In other words, this is a purchase or sale, conducted not on a single exchange, but on several completely different ones at once.
Types of Arbitration Transactions
Such agreements differ depending on the asset and the way to profit that the trader has chosen to work:
- Simplified. The broker accumulates one currency and a certain type of securities.
- Complicated. Several types of currencies and stocks are involved in the work.
- Interest. The orientation of the trader is not on the price, but on the rate, depending on the specific asset.
- Commodity. Based on the difference in price for any product.
- Foreign exchange. They are made by observing the difference in the exchange rates of monetary units of some countries.
- Stock. Based on differences in the value of securities.
Directions
The arbitration practice of the transaction includes the following areas: currency, simple, complex, temporary and spatial. There are also more complex ones: conversion, pair and risk.
Currency Arbitration. The purpose of this type of transaction is to buy and sell monetary units and obtain from this benefit. The most common way to make money on the exchange.
Simple arbitration. The operation is carried out with the help of a national and any foreign currency unit. Two foreign currencies can also be involved at once. Suitable for beginners who have only recently discovered the currency or stock market.
Complicated arbitration. Operating with three or more currencies. A more labor-intensive way of earning, requiring maximum attention from the trader.
A temporary arbitration transaction is a procedure for deriving benefits from a difference in the exchange rate of one or more currencies during a certain period. Includes 4 basic operations:
- Acquisition of currency by spot at the most suitable moment for this.
- Account opening.
- Storage of currency on deposit for a certain period of time.
- Withdrawal and sale of currency already at a secondary spot.
A spatial arbitrage transaction is a process of making a profit by differentiating the exchange rate of one currency in several markets. Monetary units of different countries are purchased and sold on 2-3 exchanges, and purchase is necessarily carried out at a lower price. The greater the difference in the value of currencies, the higher the income of the trader.
Conversion Arbitration. Two or more transactions are carried out sequentially with the aim of acquiring the currency that is needed at the most favorable rate.
Risk arbitrage. It is carried out by purchasing bonds or shares of companies that have a very high risk of bankruptcy.
A pair arbitrage transaction is the sale of a pair of similar instruments in a single sector. The main feature is that stocks go together.
Transaction practice
Work on the exchange requires certain knowledge. For example, when conducting arbitrage transactions in the market, the difference in prices on exchanges in different countries and the discreteness of belts are taken into account. Such agreements also have a number of features that are very important to know in order to understand the work of the stock market:
- Low risk The profitability of trading does not affect the increase or decrease of the market, although it depends on its volume. Using conservative arbitrage deals, you can get rid of risk and make a profit that is comparable in income to government bonds.
- They allow receiving financial rewards not only to those who invest, but also helps the functioning of the stock market as a whole.
- One of the most popular transactions from which you can derive more benefits are intraday arbitrage. So from each individual operation you can make a profit.
A sufficiently significant risk of this type of transaction is taxation. It depends on several factors: market, situation, strategy.
Risk and profit
Arbitration transactions have a very clear essence. They are a simple operation, which, however, has a certain trick. The investor must pay for various contributions, both exchange and clearing, which are not taken into account by any brokerage tariff.
What is the risk and profit from this type of transaction? The probability of losing money in the market can be reduced to zero. Profit ceases to depend on changes in the exchange. You can earn a lot of income, but for this you need to get involved in intraday transactions.
Profit will not always be high if the work is done through conservative arbitration. Sometimes, to make even larger transactions, it is necessary to go not only outside the exchange, but also beyond the boundaries of the fund.
Trading strategy
Arbitration involves not only making a purchase at one site, but selling to another through a certain segment and with a higher price. To minimize risks, these transactions must occur at the same time. They are also carried out using deposit receipts, stocks, bonds, currencies and various interest rates.
So, arbitrage is a trading strategy that is performed with minimal investments, losses and helps to make big profits if all the rules are followed correctly. It should also be borne in mind that conducting an arbitration transaction will be relevant only if the income, which is potential, will cover all expenses that have been committed for this transaction. And also if a person is ready to engage in daily activities in order to buy and sell securities.
If we consider stocks only as an investment tool, and not be prepared for risk, then this type of earnings can bring only losses.