How to make money through Arbitrage
Arbitrage is the practice of buying and selling the same commodity or service at the same time. To make a profit you buy low and sell high. Your sales price has to cover your costs of acquisition and delivery (if there are any).
Let’s say you buy a car for $10,000 on Tuesday and sell it for $15,000 on Wednesday. That is arbitrage. On the other hand, if you buy a car for $10,000 on January 1 and sell it for $18,000 on December 20 then that is NOT arbitrage.
Although definitions of arbitrage may vary slightly, the rule of thumb is that your acquisition and disposition of the goods and services happens within the same accounting period so that you technically carry no assets or obligations on your books.
People may buy expensive merchandise at specialty retail outlet malls and sell it for more than they paid online. That resembles arbitrage but it’s only arbitrage if the items are bought and sold within a very short period of time.
If you arrange to buy a house (closing) on the 1st of the month and sell it (closing) on the 27th of the month that is a form of arbitrage. The goal of arbitrage is to build up a cash flow with as little inventory and debt as possible.
You want your customers to pay your vendors, or keep the transactions as close together as possible so that you are never out of pocket for very long if at all.
On the Internet it was popular for a while for people to put display advertising on their sites and then purchase ads to bring visitors to those sites. If you were paid $11 per click and it only cost you $5 to get each click on an ad, then you were ahead $6 per click. Advertisers hated this and the advertising networks shut down the practice.
But a new form of Web arbitrage has emerged. Instead of buying advertising publishers simply “buy traffic”. They may get the traffic through advertising or it may be fake traffic generated by software. The traffic may then be channeled to other Websites through other traffic selling services; or the traffic may be used to inflate the paper value of a Website so that it can be sold.
It is the arbitrager who is the winner in these kinds of exchanges because he is nothing more than a middle man. The arbitrager’s customers are paying more for their goods and services than he is and his vendors are receiving less for their goods and services than they could get from the direct market.
But the arbitrager also takes on risk. He may not be able to unload the goods and services he has bought. Or he may only be able to sell at a price that doesn’t cover all his costs. Arbitrage is not just a game of “buy low, sell high” but also a game of finding the right opportunities. Some people have gone into financial ruin while trying to arbitrage their way to financial success.
Day traders who buy and sell stocks, stock options, commodities, and commodities option contracts are arbitragers. They try to buy low in the morning and sell high in the afternoon or they may try to sell high in the morning and buy low in the afternoon. The day trader has to buy and sell in large quantities to avoid paying a lot of money in trading fees.
Although we have heard stories of people making a lot of money through day trading on the Internet the truth is much more harsh than that. Many thousands of day traders lost a lot of money because they were in over their heads, or the markets turned against them. Also, whereas pure day trading simply attempts to capitalize on changes in market valuations some people have conducted elaborate schemes to manipulate stock prices so that they could buy low and sell high.
Arbitrage is not a simple or easy wealth accumulation strategy. It is probably better for most people to avoid it, at least until they have the reserves to withstand some losses as they learn how to find the right opportunities and link them up. You have to find both sellers and buyers who don’t know about each other and who are willing to part with or acquire whatever you are arbitraging at prices that work for you.