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RESOURCES:
Investing Articles
Just what is Arbitrage Investment?
By Gary Durkin
In the
simplest of terms, Arbitrage means to exploit price differential.
Usually
it meant looking at differing sources of an investment, and
if there was a price difference between Source A and Source
B - then the investor / dealer / broker / manager would buy
from the lower priced source, and sell on the higher priced
source.
Example:-
The price of Stock ABC was $20 per share on Exchange XYZ
The price of the same Stock ABC on another Exchange 123 -
was $15
The dealer
would buy the stock from Exchange 123 for $15 - then sell
on Exchange XYZ for $20 - making $5 per share profit (minus
costs).
Typically
the price differential was very small - and trading had to
be extremely quick and liquid - otherwise the markets could
go against you in a very short time.
Ten years
ago Arbitrage was more commonplace than it is today - for
a number of reasons.
Nowadays,
Arbitrage still exists, but either in limited formats and
availability as direct arbitrage, or more commonly in Hedge
Funds.
Hedge
Funds can have Arbitrage as one of their investment methodologies
/ strategies - and you will find that many of the past Arbitrage
Managers have switched across to Hedge Funds.
Even after
the LTCM (Long Term Capital Management) scandal / fiasco a
few years ago - Hedge Funds continue to grow, and today are
the biggest and fastest growing investment style in the World.
This doesn't
mean that Arbitrage is dead - as it can be part of Hedge Funds.
There are still some direct / explicit Arbitrage Funds available
in the World.
Most of
these concentrate on M&A Arbitrage (Mergers and Acquisitions)
- or more usually Mergers.
The manager
will actively seek companies which have been targeted as potentials
for takeover, and buy into that company, in the hope the M&A
activity will drive up the price.
This method
is often enhanced by the use of leveraging (gearing up / borrowing)
(remember LTCM?) - and sometimes using Derivative Structures
such as Options - or hedging methods such as selling short.
Depending
on the structure, methodology, management style, leveraging
etc., the potential rewards can be substantial, but so can
the risks.
Not all
Arbitrage investments are the same - just like any other asset
class, I would strongly suggest that anyone considering this
should perform their own Due Diligence and seek professional
advice.
One very
common place where Arbitrage happens every day - by people
just like you and me..... is eBay!
Sellers
are locating items for sale from sources which may sell them
very cheaply (flee-markets, garage sales etc.) and then selling
them online for a tidy little profit.
These
people are exploiting the price differential - arbitrage -
and there's nothing wrong with that!!
It’s
all about ‘Supply and Demand’ - but that’s
another story!
(the information
contained herein is for information purposes only and should
NOT be considered as advice or recommendation relating to
the purchase or sale of any investment).
An article
by Gary Durkin
Founder
of the Internet Advice Center®
http://www.InternetAdviceCenter.com
Gary has
more than a decade of offline international business success
behind him - each day controlling millions of dollars of investments
world-wide, and has been doing business online for 6 years.
©
Copyright 2005 - All Rights Reserved worldwide.
You are
free to distribute this article, providing it remains unchanged
and with the resource / bio box attached.
Article
Source: http://EzineArticles.com/
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