Price arbitrage is an investment strategy where the investor, instead of buying and selling from exchanges, buys products from producers at low prices and resells them to retailers at high prices. The retail price gap between the wholesale and retail price is therefore minus the retail price of the products. If an investor is successful in buying products at low prices and reselling them at high prices, he can realize a profit. This is a form of price manipulation that has been around since the beginning of retail sales. Arbitrage has even been called “The Power of Two.”
If this price gap is big enough, the arbitrageur may be able to double his investment and earn profits. Arbitrage is thus very risky. But there are ways in which to reduce arbitrage risk. One such way is by controlling the retail price gap. Another way is to use leverage and spread betting.
By setting a minimum retail price required for items bought and sold from the same supplier, you eliminate some of the risks inherent in arbitrage. Setting a price gap of at least two percent means that you will probably make only a small profit. In most cases, the gap will not be that large. Hence, you will still lose some profit.
But setting a minimum retail price means that you will make a profit even if the market price is higher than your established retail price. Thus, setting your price above the retail price makes arbitrage a worthwhile strategy. But some investors have become quite skilled at this. They know how to set their retail price below the wholesale price. And, when they see a gap in between, they will purchase and sell in the margin, thus making profits even in the face of market volatility.
Of course, you cannot go on using a tactic like this indefinitely. There will come a time when you will need to set your retail price above the wholesale price. At that point, you will be in violation of the Federal Trade Commission’s order concerning transactions in foreign countries. And you will be assessed heavily by your accountants and bankers for the cost of such an illegal transaction. So, it makes sense to set your price so that you can reap profits only for as long as you are legally allowed to do so.
But how do you arbitrage shop? The first thing you should do is to learn how retail prices in different stores differ. Go shopping! Compare prices between stores before you set a retail price. This practice will not only allow you to avoid paying high markups, it will also reduce the potential for arbitrage losses.
Learn how retail prices vary across industries and segments. Then, go shopping with someone who knows that retail prices differ across industries. You will find it much easier to bargain with such an individual. Bargain price, even if retail prices differ by a few percent.
But if price arbitrage retail doesn’t work for you, there’s another option. You could start an online business that specializes in arbitrage. Many online businesses operate through a program where you invest a small amount of money to get discounted products. You then pass on the savings to others. Many of these companies offer a service where you sell your arbitrage purchases back to the retailer or the company that you bought from at a lower price.
The best thing about price arbitrage is that you can start relatively cheap. Since the retail price you paid to purchase the item was much lower than its current retail price, you can justify a higher price. If the item you bought goes on sale, you will be able to sell it at a nice profit. In short, you’ll be able to make some serious money.
Arbitrage is a double-edged sword. On one hand, it allows people to buy products for much cheaper than their retail prices. On the other hand, they can also get into trouble for charging inflated prices. For example, if you bought a $200 pair of running shoes from a big-name department store at a price that would earn you around 25% off but sold it for the retail price, you would’ve made a nice profit. On the other hand, if you bought the shoes from the local drugstore at a price that would earn you about fifty cents on the dollar, you’d gotten into trouble. Even though you probably bought the shoes because you thought they were priced affordably, if you charged retail prices instead of discount prices, you could find yourself in trouble.
If you want to learn more about price arbitrage, an experienced friend or relative might be willing to tutor you. A class at your local university may also be helpful. If you’re determined to become rich by arbitrating price differences, you’re going to have to work hard at it. However, if you put in the effort and are consistent, you can build a fortune for yourself. The best advice for getting started is to start small and build your way up.
