What is an Arbitrage? Definition or Meaning

You know when you drive a new car out of a car dealer, its price immediately depreciates? Well, imagine if the opposite were true. Wouldn’t you find a seller who is offering the best price for your car, sell it and pocket the profit? In financial markets, these scenarios do exist and buying your investment from one market and selling it in another for a higher rate is called arbitrage.

For example…

Let’s say Mary bought shares from Qantas at the Australian Stock Exchange for ten dollars. Then she saw that the same share trading at ten dollars and twelve cents at Euronext. She decides to sell her Qantas stock at Euronext and profit from the extra twelve cents. This is called arbitrage. Imagine if Mary had a hundred shares, the profit she would make would be twelve dollars.