© 2015 Shmoop University, Inc. All rights reserved.

Finance Glossary

Just call us Bond. Amortized bond.

Over 700 finance terms, Shmooped to perfection.



Talk about a great word to use at cocktail parties (especially if you can say it with a vaguely Euro posh accent). Arbitrage is the business of finding something for cheap and then turning around and selling it for more to another customer, keeping the profits.

Let's say that the kid down the block is selling lemonade for $0.50 a glass, but the local construction workers are willing to pay $1.00 a glass. You buy from the kid, upsell to the construction guys, and pocket the $0.50 difference each time.

Back in the good old days, arbitrage was considered easy money. Thanks to online and electronic trading, though, it's gotten a lot less profitable. For one thing, any 14-year-old with an Internet connection can find a cheaper deal online, so there's less opportunity. There's also less need for the middle man. The construction workers probably have an app on their phone that lets them find the cheapest lemonade around, meaning they don't need your help.

Another current problem with arbitage is the commissions and other costs and fees. Every trade you make online is going to cost you something, so there needs to be a big difference between buy and sell prices for you to make a profit. 


You find gold for sale in Spain for $1,302.50 per ounce when you know buyers in the U.S. who will pay $1,303 per ounce. You're pocketing 50 cents an ounce... which doesn't seem like much, but if you bought and sold 2 tons, that's 16 x 4,000 x $.50 = $32,000... not bad for a few phone calls. But what if a teeny tiny commission of just 0.1% (that's one tenth of one percent) had to be paid on the transaction on each side? You only made 50 cents an ounce to begin with. A 0.1% transaction cost would be $1.30+ on either side. The commish completely destroys the "arb opportunity" in the trade.