The meaning of arbitrage is basically to purchase and then sell a commodity simultaneously in order to make a profit from the differences in the level of the buying and the selling costs. This is by no means a new practice, as this was been done even during the era of the barter exchange when people would exchange commodity for commodity and no money changed hands. Arbitrage was seen when one person would take a commodity and traded it for something that is more valuable.
The process of supply and demand is very crucial in arbitrage systems, as this what dictates the cost of commodities in the marketplace. What happens in this process albeit it is so powerful; is really quite simple. This is how it works; if a certain commodity or commodities on the market is in much greater supply when compared to the demand for it, then the cost of that commodity will decrease. On the other hand, if there is a huge demand for that same commodity, yet the supply of the commodity is low, then that will push up the cost of the commodity. Simply put then, the higher the demand for a product in relation to its supply, the more you will end up paying for it, while the lower the demand for a product in relation to its supply, the less you will have to be out of pocket to acquire it. As such, the fluctuation in supply and demand is what will determine the price of commodities in the marketplace. As such, what happens in arbitrage systems is that these traders purchase the products at a lower rate and sell it at a cost that is rising at a steady rate; nearly at the same time.
Arbitrage can be seen and undertaken in different ways depending the market you are in. It is deemed to be plain thievery by some economists, but in truth, it is simply an extremely astute strategy of trading.
In the commodity and goods markets, there is sometimes those persons who are referred to as middlemen who help to manipulate the supply of certain commodities in the marketplace. Arbitrage systems are even banned in some countries, as it is said to be what is causing too much inflation on the general levels of prices.
Trading arbitrage tactics are quite popular in stock exchanges and stock markets. The rapid buying and selling of the shares of a particular company which happens within mere seconds or minutes, as well as where shares are bought in one market and almost immediately sold in another.
With Forex trading, there is widespread use of arbitrage systems. What investors do is to purchase a currency that is weak and then simultaneously sell a currency that is increasingly rising. The rapid way in which the value of currencies change does make it quite hard to use the arbitrage system in many cases however.
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Check out rate arbitrage, for more information on Forex Arbitrage.
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