What Is Arbitrage? Definition and Example

What Is Arbitrage?

By Matthew Frankel, CFP – Updated Sep 8, 2025 at 11:56 PM EST

Key Points

Arbitrage exploits market inefficiencies for quick, risk-free profits by buying and selling identical assets.
Merger arbitrage offers potential gains by purchasing stocks pre-acquisition, betting the acquisition completes.
Assess risks such as deal completion and alternative risk-free returns before engaging in arbitrage.

Arbitrage refers to an investment strategy designed to produce a risk-free profit. In its purest form, an arbitrage involves buying an asset on one market while simultaneously selling the same asset on another market for a higher price. It can refer to a stock, exchange-traded fund (ETF), currency, commodity, or any other type of liquid asset. The goal is to take advantage of inefficiencies in the stock market that cause temporary price differences.

For example, let’s say that shares of a certain stock are trading for the equivalent of $30 per share on an international stock exchange but are trading for $30.10 in the United States. By simultaneously purchasing shares on the foreign exchange and selling the same number of shares in the U.S., you are guaranteeing yourself a $0.10 profit per share on the trade.

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Person in office looking at computer screen with stock chart and celebrating. — Image source: Getty Images.

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In practice, this type of arbitrage is easier said than done. Modern financial markets are highly efficient, and pricing differences for the same asset rarely exist for more than a few milliseconds. Most successful arbitrage traders (or arbitrageurs) work for major financial institutions since they have the capital and sophisticated trading systems needed to take advantage of opportunities that disappear extremely quickly.

While selling assets on different markets at the same time is the purest definition of arbitrage, there are some other forms.

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Certificate of Deposit (CD)

A low-risk, time-bound savings account offering higher interest rates in exchange for locking in funds.

On a related note, you also need to consider the risk-free return you can get from investments such as short-term Treasury securities. If an arbitrage strategy pays a 6% annualized return while you could get a 5% return simply by buying short-term Treasuries or putting your money in an FDIC-insured certificate of deposit, it might not be worth pursuing.

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About the Author

Matt Frankel, CFP, is a contributing Motley Fool stock market analyst and personal finance expert covering financial stocks, REITs, SPACs, and personal finance. Prior to The Motley Fool, Matt taught high school and college mathematics. He holds a bachelor’s degree in physics from the University of South Carolina, a master’s degree in mathematics from Nova Southeastern University, and a graduate certificate in financial planning from Florida State University. He won a SABEW award for coverage of the 2017 Tax Cuts and Jobs Act. He is also regularly interviewed by Cheddar, The National Desk, and other TV networks and publications for his financial, stock market, and investing expertise.

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Matt Frankel has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.