24/07/2013
Difference between Arbitrage and Speculation--
Arbitrage and speculation are very different strategies. Arbitrage involves the simultaneous buying and selling of an asset in order to profit from small differences in price. Often, arbitrageurs buy stock on one market (for example, a financial market in the United States like the NYSE) while simultaneously selling the same stock on a different market (such as the London Stock Exchange). In the United States, the stock would be traded in US dollars, while in London, the stock would be traded in pounds.
Speculation, on the other hand, is a type financial strategy that involves a significant amount of risk. Financial speculation can involve the trading of instruments such as bonds, commodities, currencies and derivatives. Speculators attempt to profit from rising and falling prices. A trader, for example, may open a long (buy) position in a stock index futures contract with the expectation of profiting from rising prices. If the value of the index rises, the trader may close the trade for a profit. Conversely, if the value of the index falls, the trade might be closed for a loss.