Arbitrage is a trade of taking profit of a price difference between two or more markets. The definition can be simplified as to buy an asset at a low price then immediately selling it on a different market for a higher price.
1. Buy in one country and sell in other: The arbitrageurs constantly visit different places where discounted goods are likely to found.It is important to identify the goods that can be sold at maximum profit elsewhere. This type of arbitrage relies on the buying and selling at the same time. The arbitrageurs need to act immediately whenever an imbalance happens in the market. Suppose the price of a laptop in San Francisco for $300. The same laptop in New York is $400. Anyone who lives in San Francisco could buy for $300 and sell in New York for $400 with a profit of $100. You can also sell the laptop at ebay or to someone you know in New York. Considering the transaction charges, you can still manage to get a good profit. As the supply of laptops in New York increases, the price of the laptop will decrease, and as the supply of San Francisco decreases, the price of the laptop will increase. After some time, the price of the item will almost be same. The arbitrage opportunity ends here. The arbitrage is very common in Europe as free trade exists between all countries of European Union.
2. Online Arbitrage: Arbitrage is a popular method to make money online. Online Arbitrage is an advertising technique which involves buying traffic from a website that directs to your site and selling advertising space on your website. This is also called Contextual Ad (CPC). Suppose in Google AdSense “Car Magazine” is paying $1 per click. Looking on Yahoo or MSN you find that they are paying $0.75 per click. You can buy the traffic from Yahoo or MSN and divert it to Google AdSense. The arbitrage opportunities are daily available in retail market, auction sites, forex, stock, and commodities market.You can buy a commodity in one market and sells it instantly at a higher price in another. On Ebay, Ebid, Listia, UBid, or other auction sites, arbitrageurs use to buy items online at lower than usual prices and then sell them for a profit – either on other auction sites or offline. The arbitrage depends on strong and efficient connections. You need to be quick to move products from one market to another, because the inefficient pricing setups are usually corrected immediately, eliminating the opportunity for arbitrage.