What is Arbitrage Trading ?
“Arbitrage” trading is simply the trading of securities when the opportunity exists during the trading day to take advantage of differences in value between the markets the trades are made within. Arbitrage trading takes place all day long on most days that the markets are active.
Arbritrage is legally allowed. In fact arbitrage is responsible for a large part of the daily volumes on the NSE & BSE exchanges.
What mainly takes place in India is called Market Arbitrage
Market Arbitrage involves purchasing and selling the same security at the same time in different markets (BSE & NSE) to take advantage of a price difference between the two separate markets. A market arbitrageur would short sell the higher priced stock and buy the lower priced one. The profit is the spread between the two assets.
Here is a simple example:
Suppose you own 600 shares of RPL. One trading day you notice that RPL is trading at 150 on the BSE and 145 on the NSE. You sell your 600 shares on the BSE at 150 and simultaneously buy back the 600 shares on the NSE at 145.
You profit in this case is 600*5.00 = 3000.00 less brokerages if any.
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