Price arbitrage is a way to trade currencies together, buying low and selling high. This is not to be confused with stock arbitrage, which is the art of buying and selling shares of a company at prevailing market prices. In this case, the trader would be looking to make a profit, though it may appear as if he/she is purchasing shares of the low-priced firm and selling shares of the expensive firm. However, this is not how price arbitrage works, and in the following paragraphs we will explain the basics of the process.
Price arbitrage can take place in two different ways, and both are equally valid. One example of the price arbitrage retail investor is the grocery store owner who finds a good price on a particular item from a manufacturer that sells the item at a lower price. He then attempts to resell the product to his customers for a profit, by matching the market price. Another retail investor might, instead, be a bookstore owner who buys a book at a wholesale price, and then attempts to resell it for retail value.
Arbitrage pricing is based on supply and demand. If there is more supply of a good than demand, the price will be higher than if there is less supply and the demand for the good exceeds the supply. The prices of many common items such as oil, gold, silver, wheat, pork bellies, gasoline, diamond earrings, aluminum coins, and postage stamps are determined by the supply and demand price differential.
It is this price difference between retail and wholesale prices which drives retail price competition. A retail trader uses a certain strategy to take advantage of this price differential, in order to buy products at retail price, and sell them to their customers for a profit. For example, if an item is sold at retail price, and a competitor sells it for a lower price, the retail trader may choose to sell the item at another price. However, a retail trader may decide to sell the item at wholesale value, in order to maximize his or her profit.
Price arbitrage retail is extremely profitable, as demonstrated by the number of websites dedicated to publishing articles and blogs about this subject. However, for inexperienced or amateur traders, price arbitrage can also lead to some very serious losses. Price arbitrage allows the retail trader to buy a product at retail price, and sell it at wholesale price, for a profit. But inexperienced price arbitrage traders may make mistakes which cause them to over-price their goods, under-price their merchandise, or even misrepresent the product.
For example, if a retail seller sells T-shirts at retail price, and an eBay user buys the same shirt at a different online store for a cheaper price, the seller may under-value the item. He or she will probably not realize this fact until the buyer has already paid for the item. That buyer, in turn, may post a complaint about the under-valuation on eBay, and demand a refund. The eBay seller, for his part, would have to take the customer’s word that the price quoted was correct, and then either cancel the auction or give the customer the full retail price.
In these cases, however, arbitrage retail is not necessarily bad. If the retail trader can afford to take some risk to gain an advantage, it is a perfectly acceptable strategy. But the vast majority of arbitrageurs should not risk more than they can handle. For most people, making money with arbitrage is about being disciplined enough to set realistic price targets and closing when they hit one.
As a rule, price arbitrage is a fine strategy for the experienced retailer who has established a reliable buying and selling system, and who knows how to accurately read the trends in online retailing. For the novice or inexperienced trader, price arbitrage can be a dangerous strategy. Only those who can afford to take big risks can survive in this retail price strategy.