Arbitrage

Arbitrage is a trading strategy whereby a trader sells a security in one market and buys the same security in another market. Arbitrage is a term used to describe the purchase of a product which is then immediately sold to make a profit.

Arbitrage is popular in the stock market or as a means to make profit from goods being sold at differing prices in varying markets. A person who uses arbitrage is called an arbitrageur.

The person who conducts and takes advantage of arbitrage in stocks, commodities, interest rate bonds, derivative products, forex is know as an arbitrageur.

Arbitrage refers to the opportunity of taking advantage between the price difference between two different markets for that same stock or commodity.

Arbitrage is described as risk free because participants are not speculating on market movements. Instead, they bet on the mis-pricing of a share/asset that has happened between to related markets.

It is a highly technical field. Market’s mis-pricing is taken advantage by traders to make risk free gains.

Market arbitrageurs assume the risk that the price of a security in the offsetting market may rise unexpectedly and result in a loss. In theory, market arbitrage opportunities should only exist for a short time because security prices adjust according to forces of supply and demand.

Primarily, large institutional investors and hedge funds are the ones capable of profiting from market arbitrage opportunities. The spread between unequally priced securities is usually only a few cents, so very large amounts of capital are required in order to make substantial profits.

In simple terms one can understand by an example of a commodity selling in one market at price x and the same commodity selling in another market at price x + y. Now this y, is the difference between the two markets is the arbitrage available to the trader. The trade is carried simultaneously at both the markets so theoretically there is no risk. (This arbitrage should not be confused with the word arbitration, as arbitration is referred to solving of dispute between two or more parties. )

Arbitrage opportunities exists between different markets because there are different kind of players in the market, some might be speculators, others jobbers, some market-markets, and some might be arbitrageurs.

In India there are a good amount of Arbitrage opportunities between NCDEX, MCX in commodities.

In the Indian Stock Market, there are a good amount of Arbitrage opportunities between NSE, Cash and Future market and BSE, Cash and Future market.     

Arbitrage Examples

• Arbitrage exists in sports betting. When bookmakers offer various odds it opens the opportunity for betters to spread their cash out among different bookmakers in order take the best odds on each and cover any possible win or lose circumstance. This tactic often results in a small profit, but can be much more at times.

• Exchange-traded funds, traded in the stock market, are also a means for an arbitrageur to make a profit. Participants in exchange-traded funds exchange shares in underlying securities as well as in the fund. This is different than the sale of other mutual funds since it does not promote shares being bought or sold with the fund sponsor. Prices are set by demand; and, when a drastic premium of the assets occurs, the underlying securities can be bought, converted and then sold in the open market. Similarly, when a drastic discount exists, the securities will be sold.

• Supposing a stock on the NYSE is not in line with the stock's corresponding futures contract on OCX. The more inexpensive stock or contract can be purchased and then sold at a higher price on the other market.

• Hedge funds can also use arbitrage to make a profit. Instead of purchasing and selling the same asset, a hedge fund might purchase and sell different derivatives, assets and securities that have similar characteristics. This practice lets the hedge fund "hedge" any big price differences between the two assets. 

• The term arbitrage is also utilized by Google to describe those advertisers whose sites are filled with a lot of advertisements. They are banned from advertising on Google since the advertisers will make more money just from hosting the ads than Google would make from a user clicking only once. 

In summary, arbitrage basically means the exchanging of one thing for another to take advantage of price differences in two markets, hence earning a profit.

In most of the transactions of Arbitrage in stocks and commodities markets, the traders tries to square up the transaction by reversing both his trades and he pockets the difference in this way.

In any transaction, 100% risk can never be removed but the risk is highly reduced in an arbitrage transaction because generally at the end of the settlement, the spot and the future price have to converge and that is when an arbitrageur can quit his positions without any loss.

What is "Depression"

The Great Depression didn’t happen overnight, It was caused by a whole bunch of factors including deflation where money is not worth as much as it used to be, A decline in trade this is important because if no one is buying our goods then we cannot make money.

The Great Depression of 1929 to the late 1930s was the largest economic downturn in the history of the modern world. Although capitalism's boom and bust cycle has been producing a bust roughly every decade or so since the early 19th century, this was the worst.

The Great Depression was an economic collapse that began in the United States in 1929 and spread across the globe, lasting for much of the 1930s. During the Great Depression, millions of Americans lost almost everything they had: their jobs, as the economy contracted; their investments, as the stock market plunged; and their savings, as bank after bank failed.

The Great Depression was the most severe economic crisis in U.S. history. And even before it had ended, journalists, historians, and especially economists were trying to put together the pieces to figure out what exactly had caused it.

Today, more than three-quarters of a century after the Great Depression began, its causes are still the subject of much debate.

The term depression is usually defined now simply as an economic downturn that is longer lasting and more severe than the more frequently occurring recessions. Sometimes, in order to define the term more formally, a depression is said to begin when GDP declines more than 10% from the most recent economic peak. By this criterion, the last two real depressions in the United States occurred:

•  From 1929 to 1933—the Great Depression—where US GDP declined by nearly 33%   and unemployment rose to 25%. 
•  In 1937-38, where GDP declined by more than 18% and unemployment reached 19%.

By contrast, US GDP declined at most 5% in the severe recession of 1973-75.

In general, periods of economic depression are characterized by greatly reduced GDP, as well as severely high measures of unemployment, foreclosures, business closures, and greatly reduced wholesale and retail sales activity.

Define "Boom Market"

A boom refers to a rising financial market. Another term for boom would be a bull market. Period that follows recovery phase in a standard economic cycle. A boom is characterized by an economy working at full or near-full capacity, strong consumer demand, low rate of unemployment, and a rising stockmarket, usually accompanied by rapidly increasing consumer prices (inflation).

Although the stock market has the reputation of being a risky investment, it did not appear that way in the 1920s. With the mood of the country exuberant, the stock market seemed an infallible investment in the future.

During a stock market boom the majority of stocks rise in price and there is often a euphoric feeling about the market. A boom market does not necessarily refer to the stock market as a whole. As more people invested in the stock market, stock prices began to rise. This was first noticeable in 1925. Stock prices then bobbed up and down throughout 1925 and 1926, followed by a strong upward trend in 1927. The strong bull market (when prices are rising in the stock market) enticed even more people to invest. And by 1928, a stock market boom had begun.

The stock market boom changed the way investors viewed the stock market. No longer was the stock market for long-term investment. Rather, in 1928, the stock market had become a place where everyday people truly believed that they could become rich. Interest in the stock market reached a fevered pitch. Stocks had become the talk of every town. Discussions about stocks could be heard everywhere, from parties to barber shops. As newspapers reported stories of ordinary people - like chauffeurs, maids, and teachers - making millions off the stock market, the fervor to buy stocks grew exponentially.

Although an increasing number of people wanted to buy stocks, not everyone had the money to do so. 

Individual sectors of the market can have explosive boom periods of high, often unsustainable growth, such as the boom in the dot com sector during the late 1990s.

The opposite of a boom period is known as a bust, and many sectors of the market traditionally have boom and bust cycles. Substantial profits can be made during a boom cycle of the market, but, similarly, fortunes can be lost when the boom ends and the prices of stocks fall.

When to buy stocks either during "Bullish" or "Bearish"

While many investors fall into one of the two categories, and tend to follow their pattern of investing, regardless of actual market conditions, bull and bear markets go in cycles.

Eventually, every bull market phase will peak, and reach a market top or a stock-market bubble. This peak is not usually a dramatic event. People are naturally unaware at the time that the market has reached the highest point it will for a few years.

A decline then follows, beginning a bear market phase. The decline is usually gradual at first and then gains momentum. A market bottom is when the market reaches it's lowest point. This signals the end the downturn, and precedes the beginning of an upward moving trend or new bull market phase.

It is very difficult to identify the bottom, or end of the downturn, while it is occurring. An upturn following a decline is often short-lived, followed by a resumed declining of prices. This can bring losses for an investor who purchases shares during a "false" market bottom, and must then sell them at an even lower price due to insufficient liquidity.

Some people believe that recognizing bull and bear markets is a key way to make money on stock trading and investing. The basic principle for profiting from trading is to buy low and sell high. One way to do this is to buy stocks in a bear market when the prices are low and sell stocks in a bull market when the prices are high. However, recognizing the best times to buy and sell is not that much easy.

It's tough if not impossible to predict consistently when the trends in the market will change. Part of the difficulty is that psychological effects and speculation can sometimes play a large (if not dominant) role in the markets.

Many investors sell in a bear market, either because they become too emotional about trading and don’t want to risk bigger losses, or they don’t have the liquidity to hold onto their investments while awaiting a market reversal.

If a large number of investors are fearful and pessimistic during a bear market, they are likely to contribute to further declines by “panic selling.”

Conversely, the optimism and increased trading that occurs during a bull market serves to boost investor confidence. The increased liquidity results in higher volumes of trading, further raising the prices of stocks.

Ways to Profit in Bull Markets

A bull market occurs when security prices rise faster than the overall average rate. These market types are accompanied by economic growth periods and optimism among investors.

New investors often assume that they need to avoid investing during bear markets, and invest heavily during bull markets. This is not the case. Experienced investors know that you need to be able to invest in any sort of market condition, provided that you do so wisely. Each investor has a different strategy for dealing with a bull market or bearish markets. 

Many investors try to take advantage of bull markets by buying stocks as soon as the market gets bullish, and then starting to sell when prices seem to have reached their peak. The difficulty, of course, is that it is almost impossible to tell when the trend is beginning and when it will peak. In general, investors can take more chances with the market during a bullish phase. Since overall prices will rise, the chances of making a profit are good.

Ways to Profit in Bear Markets

A bear market is defined as a drop of 20% or more in a market average over a one-year period, measured from the closing low to the closing high. Generally, these market types occur during economic recessions or depressions, when pessimism prevails. But amidst the rubble lie opportunities to make money for those who know how to use the right tools.

In bearish market conditions, prices are falling and the possibility of loss is pretty good. What is worse, it is not always possible to tell when bearish conditions will end. Therefore, if you invest during such market conditions, you may have to suffer some losses before bullish times return and you're able to realize a profit. For this reason, many investors decide on short selling or fixed income securities and other more conservative types of investment. 

Defensive stocks are another good option that remain stable during bearish conditions. On the other hand, some investors see bearish market conditions as an ideal time to invest in more stocks. Since many people are selling off their stocks -- including valuable blue-chip stocks -- at low prices, it is possible to set up long-term investments that will prove valuable during bullish times.

While every investor loves to see the upswing in prices during a bull market, the wise investor will be able to handle a bear market as well. Whether you are just beginning to invest or are an experienced investor, learning to deal with various market conditions you neen not panic but decide patiently on investment.

The best way to make money, regardless of the cycles of bull and bear markets, is to create a varied portfolio of investments, and to maintain sufficient liquidity to ride out the tough periods without needing to resort to panic selling.

What is "De-Listing" of Stocks

Delisting is the process by which a company's shares are taken off the stock exchange and trading in its shares stops thereafter. According to a Securities and Exchange Board of India (SEBI) directive, at least 25 per cent equity shares of a listed company must be held by the public. A company that wishes to delist must buy back shares from the public. This buyback is done through an open offer. Promoters must acquire at least 90 per cent stake to delist. The outstanding shares are purchased in the open market at a fixed price.

A delisted stock is no longer traded on a major stock exchange. Corporations sometimes voluntarily withdraw their stocks; in other cases, government regulators force a stock to delist. Regardless of the reason, delisting a stock has consequences and, in some rare cases, benefits.

Delisting can happen on two situations and can be done by the stock exchange or by the company itself. If it is done by the stock exchange then it is called compulsory delisting and if it is done by the company itself it is called voluntary delisting.

In the case of compulsory delisting, the stock exchange might remove the shares of the company if it finds that there is a breach of, on the part of the company, the legal requirements of the stock exchange. This has got its own process.

In the case of voluntary delisting, the company voluntarily would decide to go for delisting and remove its shares off the stock exchange. This is a lengthy process because the interests of the shareholders are involved. The voluntary delisting requires the mandatory meeting of all regulations including approval from board members, providing an exit opportunity for all public shareholders at a price quoted by them, and in-principle approval from the stock exchange among others.