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Definition of 'Arbitrage'

An arbitrage trade is a risk-free type of trade where the same instrument is bought and sold simultaneously in two different markets in order to cash in on the difference in these markets.

For example, some British securities are quoted on dollars on a US exchange and in sterling on a British exchange. You may be able to simultaneously buy and sell the same stock at prices which make the trade profitable.

Trading companies have sophisticated computer software that watch for mismatched prices suck as this and instantaneously take advantage of this arbitrage opportunity which keeps the market in balance and nowadays arbitrage is rare.

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