Arbitrage Explained

The biggest difference between trading in shares and spread betting is that with spread betting, you do not actually buy or sell any shares. Instead, you are merely speculating that their price will rise or fall, with the spread betting firm acting as a kind of financial bookmaker. While the prices listed on spread betting websites do reflect real movements in the markets, they are not always identical. In fact, sometimes the prices quoted on different spread betting websites can differ. While this is an increasingly rare occurrence, it does happen from time to time, and when it does you can use a technique known as arbitrage to make guaranteed profits.

For example, lets say one firm is offering a buy price for a particular share of 120p and a sell price of 115p, and another firm is offering the same share for a buy price of 110p and a sell price of 105p. Because the sell price with the first firm is higher than the buy price with the other, you can guarantee a profit as long as you place a sell bet with the higher priced firm and a buy bet with the lower priced firm. Basically, if you can buy at 110p and sell at 115p, you will be guaranteed a profit. So, if the share were to rise in value, you would lose your sell bet and win your buy bet, and the winnings from the buy bet would cover the loss from the sell bet and more besides. Likewise, if the share fell in value, your sell bet would net you more than you would lose with the buy bet, due to the price differential.

Naturally, spread betting firms are keen to prevent this from happening, so they keep a keen eye on the listings of other spread betting firms, and are quick to correct their prices in the event of arbitrages. However, it is not illegal to take advantage of an arbitrage, and you will not suffer any penalties for doing so. In order to be ready to take advantage of arbitrages, you need to be signed up for several different spread betting firms, and keep a keen eye out for price differentials. If you can pull off an arbitrage spread bet, then there is no risk of loss. However, if you place one bet, and the price from the other firm is corrected before you place the bet with them, you would be left with one risky bet. For great deals on financial spread betting, visit the Trade Fair website.                                                                                                                                       By: by ForexCycle.com