Retired: What Now? Personal Finance. Credit Cards. About Us. Who Is the Motley Fool? Fool Podcasts. New Ventures. Search Search:. This means the potential for pure arbitrage has become a rare occurrence.
Merger arbitrage is a type of arbitrage related to merging entities, such as two publicly traded businesses. Generally speaking, a merger consists of two parties: the acquiring company and its target. If the target company is a publicly traded entity, then the acquiring company must purchase the outstanding share of said company. In most cases, this is at a premium to what the stock is trading for at the time of the announcement, leading to a profit for shareholders.
This is due to the risk that the deal may fall through or fail. In its most basic form, merger arbitrage involves an investor purchasing shares of the target company at its discounted price, then profiting once the deal goes through.
Yet, there are other forms of merger arbitrage. Convertible arbitrage is a form of arbitrage related to convertible bonds, also called convertible notes or convertible debt. The primary difference between a convertible bond and a traditional bond is that, with a convertible bond, the bondholder has the option to convert it into shares of the underlying company at a later date, often at a discounted rate.
In the course of making a profit, arbitrage traders enhance the efficiency of the financial markets. As they buy and sell, the price differences between identical or similar assets narrow. The lower-priced assets are bid up while the higher-priced assets are sold off. Metals Trading. Your Privacy Rights.
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I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. What Is Arbitrage? Key Takeaways Arbitrage is the simultaneous purchase and sale of an asset in different markets to exploit tiny differences in their prices. Arbitrage trades are made in stocks, commodities, and currencies. Metals Trading. Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content. Create a personalised content profile.
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