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Although is sounds complicate, it is
really not. For example, if I went to the store and brought a
popular toy on sale for $10, and then sold it on eBay for $40 that
is arbitrage. The $30 difference that I made would then be
considered arbitrage profit. This type of arbitrage falls under the
category of "one good, two markets". While it can be very lucrative
for a short time, it does not last very long. Eventually one of
three things will happen: the store is going to run out of toys, the
store is going to raise the price of the toy due to increased demand,
or eBay is going to become inundated with the toy and the value will
decline.
This "one good, two markets" type of arbitrage is also very common
in the world of sports gambling. Betting arbitrage is a kind of
arbitrage that hinges on betting markets due to either bookmaker’s
different opinions on event outcomes or plain errors. By placing one
bet per each outcome with different betting companies, the bettor
can make a profit. For example , if the Ravens are playing the
Raiders. You find a bookmaker that is giving even money on the game,
so a $100 bet placed on either team will earn you $100 if the team
you picked wins. Another bookmaker has the Ravens at +200, which
means if you place a $100 bet with this bookmaker on the Ravens to
win, you will get $200 if they win, and $100 if they lose. You can
guarantee yourself a profit by placing a $300 bet on the Raiders
with the first bookmaker at even odds; and then placing a $200 bet
on the Ravens with the second bookmaker at +200. In football there
are no ties. So either the Raiders will win, or the Ravens will win.
The slang term used by betters for an arbitrage is an arb. A typical
arb is around 2%, often less, but 4%-5% are also normal and during
some special events they might even reach 20%. Arbitrage betting is
usually done on the internet by researching prices (odds) on betting
web sites or subscribing to one of the arb-hunting services. Like
any investment, it is not completely risk-free despite the fact that
is often advertised that way. Price changes could occur midway
through the arbitrage bet, bookmakers could refuse to honor the
wager, and/or bookmakers are sometimes unable to remain solvent. It
also requires rather large sums of money to make a significant
profit.
Copyright 2006 Timothy Rohrer
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