Arbitrage

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Arbitrage is probably the cleanest way of making money in the stock market. As a matter of fact, I can go to the extent of saying that whoever is making money in the stock market is probably using some form of arbitrage. However, whoever does it, has to be secretive about it. Otherwise, the arbitrage opportunity vanishes in thin air. Being secretive is part of the deal that comes with arbitrage.

Let me explain this in layman terms. Lets say you stay in city center and you are buying apples. Your local kiranawala sells 1 kg of apple for ₹100. However, you go to the city outskirts 10 kms away, their local kiranawala will be selling the same quality of apple for ₹50. Next, you figure out that travelling 20 kms (back and forth from city center to city outskirts) will only cost you ₹10. So as it turns out, if everyday you go to city outskirts, buy 1 kg of apple and come back to sell those apples to other customers at city center, you can make a handsome profit.

Profit = (Apple Cost @ City Center) - (Cost Of Travel) - (Apple Cost @ City Outskirts)
=> Profit = ₹100 - ₹10 - ₹50
=> Profit = ₹40

So you can make a neat profit for ₹40 on a daily basis with just 1 kg of apple. That's arbitrage based risk free profit. However, there are two things to consider here -

  1. There is a limit upto which you as an individual can carry apples during transportation. After that limit is reached, you may have to go for a dedicated service or bigger transportation vehicle which will add to your cost of travel.
  2. The dynamics of demand and supply will not always remain the same. What is reasonably profitable today might not be so profitable tomorrow. Sooner or later this balance will change in turn affecting your profits.
The above two are the key reasons why everyone who is practicing arbitrage would like to keep it a secret. You see if you are making tons of money out of it, sooner or later other people will notice it (during transportation of trucks full of apples or when you sell cheapest apples on the street). And they will start doing the same. And when the demand for apples in the outskirts increase so will the cost. And slowly but steadily the arbitrage will no longer remain.

So it all boils down to a simple thing - if you have a goose laying golden eggs, don't go around announcing it. And make no mistake, if you do, the stupidity is equivalent to killing the goose that laid the golden eggs.