Equity arbitrage involves buying and selling shares of the same or similar stock to make a net profit, with traditional equity arbitrage involving buying and selling shares of the same stock priced differently in different markets. Variations, such as merger and pair swap arbitrage, carry some risk.
Equity arbitrage is the buying and selling of shares of the same or similar stock with the goal of making a net profit on the transaction. In its purest form, equity arbitrage does not involve any risk, as buying and selling take place simultaneously, ensuring an instant profit. Variations on traditional equity arbitrage, sometimes called risk arbitrage, often carry at least a small amount of risk, as they are faced in situations where profit is not guaranteed.
Traditional equity arbitrage involves buying and selling shares of the same stock that are priced differently in two different markets. For example, suppose a company has shares that sell for $10 US dollars (USD) on the New York Stock Exchange. Shares of the same company are $11 USD on the London Stock Exchange. To take advantage of equity arbitrage in this situation, an investor could buy company shares on the New York Stock Exchange and simultaneously sell them on the London Stock Exchange for a profit of $1 USD per share. Because buying and selling happen at exactly the same time, there is no risk of losing money.
A variation on traditional stock arbitration, commonly called merger arbitration, involves buying and selling shares of two companies that are about to merge. An example of this would be if Company A has a share price of $50 USD and is preparing to buy Company B, which has a share price of $24 USD. As part of the deal, Company A agrees to give shareholders of Company B one share of Company A for every two shares they own in Company B. An investor who owns shares of Company A could apply equity arbitrage to Company A. situation by selling shares of company A and buying shares of company B instead, hoping to make a profit on the $2 price difference when the companies merge. The risk in this type of situation is that the merger deal could fail or values would change rapidly.
Another variation, sometimes called a pair swap, involves buying and selling shares of very similar stocks that have historically been very close in price, but suddenly develop a more significant price movement. For example, let’s say that Electric Company X and Electric Company Y stocks typically trade within a few cents of each other. If the shares of company X suddenly rise $1 above those of company Y, an investor who owns shares of company X might sell it and reinvest the money in shares of company Y, seeking to make a profit when company shares And they reach the price of those of company X, as they historically have. Like merger arbitrage, this type of equity arbitrage also generally carries some risk, as there is no guarantee that company Y’s shares will increase in value to match those of company X.
Smart Asset.
Protect your devices with Threat Protection by NordVPN
