Who Are Arbitrage Brokers and What Is Arbitrage Trading?
People hear about brokers all the time. Have you ever heard about arbitrage brokers? Do you know what arbitrage trading is? There is no need to panic; you don’t have to be an experienced trader in order to learn more about arbitrage brokers and arbitrage trading.
First of all, what is arbitrage?
It is trading that makes the most of the small dissimilarities in price between homogenous assets in two or more markets.
How do arbitrage brokers work? The broker buys the asset, commodities, for example, in one market. What is the next step of the above-mentioned broker? The next step is to sell the above-mentioned asset somewhere else.
To make a long story short, the above-mentioned broker buys the asset in one market and sells it in the other market simultaneously to pocket the difference between the two prices.
In most cases, Arbitrage brokers are working on behalf of financial institutions. Is it easy to work as an arbitrage worker? No, it isn’t. However, it is a good job for people who aren’t afraid of challenges.
What do you need to know about arbitrage trading?
As you can see, arbitrage brokers play an important role in the modern world.
Are you interested in arbitrage trading? It makes sense to learn more about arbitrage trading.
As you already know what arbitrage is, we can move on to other important details.
We need to mention that it (arbitrage) is occasionally used in order to outline other trading activities. For example, merger arbitrage. It implies buying shares in companies before an announced or expected merger. The above-mentioned strategy is quite popular.
Types of arbitrage
Let’s take a look at the types of arbitrage. We can start with pure arbitrage.
In the case of the above-mentioned investment strategy, an investor buys and sells a security at the same time in different markets in order to take advantage of a price difference.
Now, let’s move on to merger arbitrage. It is linked to merging entities.
To cut a long story short, a merger is made up of two companies: the company as well as the company that it wants to buy.
But what happens if the company (target company) is a publicly traded entity? In that case, the company that wants to buy the above-mentioned company has no other option but to purchase the outstanding share of the company that it wants to buy.
In order not to overburden you with a lot of details, let’s simplify the case.
It is desirable to remember that the above-mentioned type of arbitrage involves investors buying shares of the target company at its discounted price, then profiting once the deal is done. As stated above, the target company is the company that another company wants to buy.
In conclusion, the role of arbitrage traders is quite important. Moreover, it makes sense to learn as much as possible about arbitrage trading.