What is Arbitrage in Finance ? Earning from price difference

Definition: Arbitrage is the process of simultaneous buying and selling of an asset from different platforms, exchanges or locations to cash in on the price difference (usually small in percentage terms). While getting into an arbitrage trade, the quantity of the underlying asset bought and sold should be the same. Only the price difference is captured as the net pay-off from the trade. The pay-off should be large enough to cover the costs involved in executing the trades (i.e. transaction costs). Else, it won't make sense for the trader to initiate the trade in the first place.

Description: Suppose an asset, gold, is quoted at Rs 27,000 per 10 gm in the Delhi bullion market and at Rs 27,500 in the Mumbai bullion market. A trader may buy 10 gm of gold in Delhi and sell it in Mumbai, making a profit of Rs 500 (Rs 27,500 - Rs 27,000). However, this trade will be profitable only if the cost of transactions is less than Rs 500 per 10 gm of gold.