The concept of arbitrage is that you buy something for a low price and sell it for a high price, keeping the difference as profit. Making money with arbitrage is a continuous process of finding sellers from whom you can buy for a low price and buyers to whom you can sell for a higher price. The main efforts in arbitrage are finding the opportunities and, in the case of very high-priced items, securing temporary funding needed to buy and hold the item until you can sell it. This form of making money is also called “flipping”, especially in real estate. Buying and selling stocks is called arbitrage, and can be done in a single day (called day trading), or any longer period of time (called short-term if held for less than a year, or long-term if held for a year or more). You might even be able to skip the finance if you sell the item before you buy it, but this also has risks. Also, in some markets like real estate it’s possible to improve an item between buying and selling to get a higher price, but in other markets like antiques or collectibles any modifications to the item generally decrease value instead, and in other markets like currencies it’s not possible to improve the item at all.
Some people are employed to do arbitrage, some people do it for themselves as a secondary source of income, and some people do it for themselves as a primary source of income.
Advantages of arbitrage:
- Wherever there’s a market, there are opportunities for arbitrage.
- In some markets like currency, it’s the same amount of work to make a little money or a lot of money, and it just depends on the spread you can find and the amount of money you have available to buy
- Once you learn how to do it, you might eventually be able to make it your primary source of income and from there either turn it into a business or free up your time to create wealth another way
Disadvantages of arbitrage:
- Like freelancing, it’s not a consistent source of income so you need to leave a buffer for months where you don’t make as much profit as usual
- It’s possible to lose money on a deal if you’re not able to find a buyer for the price you want, or if you’re not able to hold onto the asset long enough for the market demand to match your asking price (and it might not happen for a while if you accidentally bought at a peak)
- Some markets require a significant amount of money to be able to do arbitrage and you either need to have it readily available or know where you can borrow it
Compass
Return to wealth plans or financial security plan.