What is an arbitrage?

An arbitrage is where someone takes advantage of differences in price for the same item. An example of this might be buying 50 shares of stock XYZ from a European stock exchange, and then selling it on the New York Stock Exchange for a higher price, netting you a very small profit once these have been taken into account. This can be done with goods or securities, such as stocks or bonds. If enough actors in an economy notice and take advantage of an arbitrage, it will eventually close the gap in price, thus eliminating the inconsistency.

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