Finance is a sector many opportunities can rise. Arbitrage is one of them as well, buying something at a lower price and selling it significantly higher sounds like fake right let me explain it.
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Definition of Arbitrage
Arbitrage is the simultaneous purchase and sale of the same or similar asset in different markets in order to profit from tiny differences in the asset’s listed price. It exploits short-lived variations in the price of identical or similar financial instruments in different markets or in different forms.
A Simple Example
Warren Buffett at 6 years old saw that he could profit from arbitrage. He would purchase a 6-pack of Coca-Cola for 25¢ and sell each bottle for 5¢ in his neighborhood, profiting 5¢ per pack. Young Warren Buffett saw that he could profit from the difference in the price of a six-pack versus what people were willing to pay for a single bottle.
Common Conditions for Arbitrage
The conditions for arbitrage are most commonly caused by three circumstances. It often plays a crucial role in correcting these conditions.
1. Unequal Information
Participants in various markets have access to different information leading them to value an asset differently.
2. Inefficient Markets
"Inefficiency" is when a market's prices don't match an asset's true value. This can happen for any number of reasons, including unequal information, speculation, political climate, and much more.
3. Uncertain Valuation
Sometimes markets operate both efficiently and on perfect information but still price an asset differently. This often happens when traders simply disagree on what true value actually is.