What is arbitration? How a retailer can make use of it

hi i wolud like know how trade in arbitration what is the procedure to trade in arbitration is there any new & separate demate account to be openned or with the same demate is ok for this procee plesase let me know thanking you

I think you meant to say arbitrage. Price arbitrage is the difference in prices that exist for the same or related securities.

For a simple example, check the prices of any scrip listed on both NSE and BSE. You will notice a slight price difference. Making trades to take advantage of this difference is called arbitrage trading. Usually, this difference is quite small and accounts for such things as the minute difference in charges between exchanges.

In the case of a related security, a scrip's derivative (option or future) might trade at a price difference to it's underlying share price. You could potentially buy one and sell another to make a profit. Again, the differences are minute.

Arbitage is taking advantage of price difference in related scripts and trading in them.

There are three types of arbitage.

  • Price difference in different exchanges for same script. For example TCS may be trading in NSE¬†for 2530 where as in BSE it is trading for 2540. So to take advantage of this, a person can buy from NSE for 2530 and sell it for 2540 and get profit of Rs10 per share. Later when the price are neutralized or become somewhat similar, he can square off the trades and exit both positions.
  • Price difference in cash market and in futures. Future price usually follow cash market price. So when cash market price increase it is reflected in future market. When there is huge difference in cash market and future market, the differnce can be profitted by buying from cheaper one and selling in costlier one. And when price is syncronized, the positions can be closed. Keep in mind that future price will be always slightly more than cash market price due to cost of carrying. The difference mentioned here is when the price difference is more than cost of carrying.
  • Price difference in near ending future against far ending future. When there is huge price difference in near ending future and far ending future, the price difference can be profited. But that difference should be more than cost of carry as far ending future price will always be more that near ending future.

Usually the price differences will not be much for individual traders to profit. This is because there are big players using computers watching these markets and whenever there is an opportunity to profit they step in.

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