What is Arbitrage in the Forex market? Is it good for business investing?

Arbitrage is defined as a purchase made on a product with the intent on reselling the product and making a profit on the price difference.The reselling of the product will most likely take place in a different form of exchange or at least at a different location.Because the risk of loosing money is low, there are those that see Arbitrage as a form of risk-less investing.

One obvious example of Arbitrage can be seen through sales of products through online vendors such as EBay.To illustrate how Arbitrage is used in everyday terms, read the following example:

John goes to Wal-Mart and buys 15 copies of "The Little Mermaid" on DVD.Let's say that he pays $15 for each copy.John then posts on EBay that he will sell or auction off these DVD's for $25 dollars each.John has interested buyers who think that his price is reasonable and sells all 15 of his copies of "The Little Mermaid" and has made a profit of $150.This is Arbitrage.

The concept of Arbitrage is easy enough to understand in these terms and many of us have participated in Arbitrage without knowing that there was actually a term for what was being done.But how does Arbitrage apply to business investing and how can you use Arbitrage in the Forex (Foreign Exchange) market?Here is another example to help you to better understand how Arbitrage applies to investing, and more specifically, investing in the Forex market:

Let's say that American based company, ABC Incorporated, trades both on the domestic stock exchange and on a foreign exchange of another country.The interest rates of that other country are not currently at the adjusted exchange rate.So, in the U.S. ABC Inc. stock is undervalued but in another country it is overvalued.The investor buys U.S. ABC Inc. stock on a domestic stock exchange and then sells it for a profit on the Forex. This is Arbitrage on the Forex market in action.

Another question that has yet to be answered is, "Is Arbitrage in the Forex market good for business investing?"The answer really depends on the business.Arbitrage market may sound easy enough based on the examples that you have just read, but in reality there are a lot of variables that could thwart your plans to make money through Arbitrage.What if no one wants to buy your undervalued stock?Then you are stuck with stock that is decreasing in value.You could loose money if you do not wisely measure demand.

Additionally even when there is a guaranteed buyer at a higher price for your stock, fees and transaction costs can eat up your profit.You could do a lot of work and barely break even or even loose money because of un-accounted for costs.Transaction costs and the resulting effects are just some of the more compelling reasons why Arbitrage in the Forex is better left to the experts.

If you have the resources and experience at your company to confidently use Arbitrage in the Forex market then it could be a good investment move for you.But make sure that you really know what you are doing.Be sure to take all transaction costs into account.Watch the Forex market carefully so that you do not underestimate how quickly the exchange rate is adjusted.Using Arbitrage on the Forex will also require a great deal of devotion to time as timing could mean the difference between trying to sell a security that is undervalued and trying to get rid of a security that is overvalued.Unfortunately the exchange market does not make exceptions or apologize for mistakes made by novice traders.