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Making Money Without Any Risk – And I’m NOT Talking About Bank Deposit

 

In Finance, what does arbitrage mean? How to make money without taking any risk?

-‘Higher the risk, higher the return’

Or you might have heard the cliche – ‘No risk, no gain.’

Well, in the realm of financial markets, those words are not always absolutely true. You can, indeed, make money out of nowhere, without even any risk or investment incurred at all!

Before you start doubting me, let’s discuss a hypothetical scenario to clear your confusion. First of all, we have to understand what does ‘Risk’ really means. Suppose you want to start a fruit-selling business in your local market. To do so, first, you have to buy fruits with your initial investment.

Now here you have taken a risk – you never certainly know whether you’ll make a profit from your investment or not! Maybe you won’t even end up selling anything and all your money and effort will be gone!

Now think this way. Imagine there is a grocery store in front of your home, where per kg apple sells for $2. On the other hand, another grocery store which is 20 km downtown, sells the same apple for $3 per kg. As a shrewd investor, you can take 1 kg apple from your doorstep for $2, drive all along 20km to sell it for $3, and then give them $2 to your initial grocery store keeping the rest $1 in your pocket!

“But wait a minute, why the hell would the first storekeeper give me 1 kg apple without any payment? And why am I ignoring the fuel cost that I have to incur while driving my car?”

Okay, you got me. In real life, those questions are extremely valid. You can’t expect anybody to give you free lunch or sell anything without incurring any ancillary cost. However, the above-mentioned example is called ‘Arbitrage’ in the world of finance, which is absolutely a commonplace event in our mundane financial activities!

By definition, Arbitrage is the precept of taking advantage of a price difference between two or more assets in different markets and profiting until the price difference disappears. In a financial market, it is absolutely possible that you make money from a price discrepancy, literally out of nowhere!

But the real question is – HOW?

And don’t forget the initial investment. Your neighborhood storekeeper allowed you to have an apple without prepayment. In the financial industry, you may have this facility in the form of a bank loan. And also, the fuel cost of your car may be treated as a Transaction Cost in the financial market.

In my next article, I shall try to explore a little bit more about arbitrage opportunities. One more thing, I would be more than delighted to answer any finance-related question from you. Till then, stay safe!

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Location: Dhaka, Bangladesh

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