Arbitrage
Principles of Finance glossary · Risk, Return & Portfolio Theory
Definition
A trading strategy that generates a risk-free profit with no net investment.
Arbitrage in plain English
Arbitrage is the closest thing finance has to a free lunch: you spot the exact same thing selling for two different prices and pocket the gap with essentially zero risk. Imagine a gold coin selling for $100 in one shop and $102 in the shop next door — you buy at $100, instantly sell at $102, and keep $2 without putting any of your own money at risk. In real markets these gaps are tiny and vanish in seconds as traders pounce, which is exactly why we usually assume 'no free lunches' when pricing things. The 'no net investment' part means you fund the buy with the sale, so you're not really tying up your own cash.
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