Arbitrage… Sounds kind of complicated, but it’s happening all around us, and there are plenty of opportunities to take advantage of.
In the financial world, it refers to a trading strategy where the profits are made off of changes in security prices.
But let’s call a spade a spade; it’s basically where you just buy low and sell high. If you’re buying something, you’re looking for the opportune moment to buy. Likewise, if you’re selling, you’re keeping a close watch on when you can sell for more. Arbitrage is really the two concepts rolled into one.
The McDonald’s McRib is actually a great example. You might have noticed how the sandwich is sold periodically, and isn’t available for purchase at all times.
This is because the selling of the McRib, which is a barbecue style pork sandwich, coincides with the falling prices of pork. In other words, McDonald’s can sell it to us for maximum profit!
They bought low, and then resold at a higher price. Got it?
So arbitrage might require you to keep a close watch on things, but you can easily make a lot of little profits that can quickly add up to greater profits if you do it right.
Examples Of Arbitrage
Now, arbitrage is most frequently seen in the investment world. And, make no mistake about it; there seems to be a deliberate attempt to confuse people outside of the financial sector.
But arbitrage is not as esoteric or novel as an idea as it may seem. Here are several examples to clear things up and show you how it works in practice.
Consider arbitrage sports betting. This is where you place bets on every possible outcome in a game. Sound crazy? Well, normally this would be a losing proposition, but you really need to think about how arbitrage works.
The idea is to place bids with multiple bookies instead of just one. And when you think about most sports events, your odds of winning are always 50% (or less if a tie is a possible outcome).
This isn’t something to take to lightly, as you would need to look at the odds and calculate your potential profits, but you can essentially stack the deck in your favor to make a small profit no matter the final outcome.
Here’s another fairly straightforward example. Remember when the Xbox 360 gaming console came out (hard to believe it’s been nearly 10 years)?
Well, as soon as the retailers started selling the new console, there were people buying them up and selling them on sites like eBay for many times the original price. This type of arbitrage is possible when the market demand is greater than supply, but again, it would be a fairly narrow window of opportunity.
Classified arbitrage is another opportunity many have taken to. You probably already know about sites like Craigslist, and if you’ve ever heard about people making a living from classified sites, that’s usually a form of arbitrage.
It could be as simple as buying someone’s old nightstand at $30, and then turning around and selling it for $50. You still need to be smart in that you have to look out for and take advantage of unusually low prices. So when you find something that could be sold for more, there’s a chance to make a bit of a profit.
How To Find Arbitrage Opportunities
This is the million dollar question, isn’t it? You can probably see from the examples that arbitrage selling can fail spectacularly. Since you need to keep your finger on the pulse of whatever market you want to exploit, you might lose some sleep and even waste a lot of time if you don’t do it right.
If you want to do well as an arbitrageur, here are several tips for you:
- Do it in a market you know well: it probably doesn’t make a lot of sense to venture too far outside of products, niches and industries you already know something about. This way you’re dealing with facts rather than just hunches and assumptions (i.e. “I found something that could sell for a lot more!”).
- Deal in exchanges with a limited number of potential outcomes: as with the example of arbitrage sports betting, the fewer the variables – often – the better. This can help you find winning strategies more often than not.
- Start small: don’t go after big ticket items out of the gate. Again, look at the definition of arbitrage; it says small profits! Not that you can’t make a lot of money using this technique, but you increase your risk of losing if you put all your money into items that you could end up having a hard time selling.
So there you go, a few quick tips on how to make sure your arbitrage deals succeed. Now, here’s how to find some opportunities:
- Watch discount or coupon sites: stuff goes on sale all the time. If you don’t believe me, check out sites like Slickdeals or Overstock.com. There is definitely an opportunity to buy low and sell high.
- Keep an eye on classified sites: if you’re looking for a deal, finding one could be as simple as watching Craigslist. Then it’s just a matter of making sure whatever you buy can actually be sold for more.
- Hunt for deals on eBay: since you can bid on stuff on eBay, the risk is really low. You never have to bid more than you’re comfortable with, and that can mean getting some good deals on goods you can easily sell at a higher price tag.
- Resell gigs: take gig ideas from a site like Fiverr, turn around and offer them for more on other service marketplaces.
Also, don’t forget to check out an earlier post I did on the topic. When you do this right, you can make a lot of easy money, plain and simple.
Are there other arbitrage opportunities out there? You better believe it!
But you have to be an opportunist. That’s the main thing.
Don’t get frustrated if you don’t find any immediate opportunities. That’s where a lot of people tend to make bad decisions.
Part of arbitrage is waiting it out. If you don’t believe me, just ask arbitrageurs in the investment world!