Arbitrage is the practice of profiting from short-term differences in price. Imagine that you can buy stock in Rent-to-Own Underwear Inc.
(ticker: EWWW) for $25 per share — in the United States. Meanwhile, you see that it’s currently selling for $25.50 per share in England. If you simultaneously buy shares in America and sell the same number of shares in England, you’ve earned a profit of 50 cents per share (not counting commissions). This may not seem like much, but it adds up quickly if you’re dealing with massive numbers of shares. That’s why those who practice arbitrage are usually institutional investors with millions of dollars to invest.
