Tuesday, June 18, 2013

Risk-less profits ?

Is there anything like "risk-less" profit in the world ?

Well, theoretically there is and that's called "arbitrage". Arbitrage happens when the "law of one price" is violated.  Traders take advantage of the inefficiencies in different markets and simultaneously buy and sell the same underlying assets (or similar assets in different forms) to lock in the price differentials (assuming zero-transaction costs).  The pair transactions must happen at the same time.

However, in reality, arbitrage opportunities are rare and unavailable to non-professionals.  And when they appear, they are usually short-lived.  The arbitrage pair-trades move the prices in the two different markets, causing them to converge.

Noteworthy though, arbitrage isn't an "investment".  When capital is invested and the acts of buying and selling happen at different points in time, that's an investment.  And investment involves R-I-S-K - the potential or probability that your action (or inaction) will lead to undesirable outcomes.

Raise your red flags when you hear investment like "fast growth", "high yields", "emerging markets", etc, promising "sexy" returns .  Read carefully the disclaimers.  Remember that Wall-Street will sell whatever Wall-Street can sell.  There is always a story behind, and it spells the same four-letter word : R-I-S-K.

Whenever something sounds too good to be true - yes, you are probably right.




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