Making a profit by identifying opportunities to buy an asset in one market and to sell it on in another market at a higher price. The flowchart below illustrates the process of arbitrage for an investor to make an instant risk-less profit. Profit can be achieved without risk because the price differences occur at the same point in time which means that the respective trades can occur at the same time to exploit the price differential and make a profit.
The price differentials normally occur due to technical reasons e.g. a financial asset is traded in two locations (e.g. London and New York) and a temporary and unintended price differential emerges. These differentials are usually correctly quickly and so arbitrage opportunities must be identified and exploited quickly. Various software applications support this process. Although the price differentials are small and apparently trivia, large levels of profit can be made by applying large sums of money to exploit a small price differential.