Arbitrage is the practice of taking advantage of a price difference between two or more markets or exchanges. In Indian markets stocks are traded in two major exchanges – NSE (National Stock Exchange) and BSE (Bombay Stock Exchange), which means you can take advantage of buying the stock in one exchange and selling it in other and bag the difference as profit.
Wait…
We have few points to consider before doing an arbitrage trades.
1. Arbitrage is not An Intraday Trade (Cost Wise)
You are not allowed to buy and sell the same stock in different exchanges on the same day. This means if you buy stock XYZ today in NSE, then you are not allowed to sell stock XYZ in BSE the same day. If you do that, you may have penalty of short selling in the exchange you sold.
It means you can only do arbitrage for stocks that you have in your DP. If you have stock XYZ in your DP, you can sell the same in BSE and buy them in NSE as well to bag a profit but then you are not doing intraday trading and so you may be paying the brokerage of delivery to your broker though you are trading on the same day – time wise.
2. Last Traded Price is not the Price for Arbitrage
If you are seeing a price difference of few Rupees in both the exchanges does not always means there is an arbitrage. Take an example of Weizzmann Forex.
We see the price in BSE as 69.90 and in NSE as 74.90, which can be concluded as an arbitrage opportunity but there is no arbitrage opportunity. Let me explain to you why.
The big price number that you see is last traded price which means those price in both the exchange is the traded price and not the price at which you will be able to trade.
Your price would be either offer price or bid price. Let me explain offer price, bid price and last traded price first in simple terms.
- Offer price is the price that others are offering their shares at. So you can buy at the offer price.
- Bid price is the price that others are willing to buy shares at. So you can sell at the bid price.
- Last traded price is the price when offer price and bid price matched and the trade took place.
So if you see the offer price and bid price in both the exchanges they are
- Offer price in NSE is 74.90 for 48 shares.
- Bid price in BSE is 67.30 for 50 shares.
So if you execute the trade then your offer price should be 67.30 in BSE and Bid Price in NSE as 74.90 and that would mean you are buying high and selling low making a loss and not a profit arbitrage.
So arbitrage exists only if you have higher bid price and lower offer price in either of the exchanges.
3. Arbitrage Trades should never be Manual
As a retail investor we may be able to spot some arbitrage opportunities but if you try to key in those trades manually, the opportunity may be gone because there are so many big traders who have automated softwares running for spotting such arbitrages and execute those trades. If you think you can beat those programs spotting arbitrages, you are wrong.
On top of that you are trading with broker in between you and the exchange but large traders have direct access to exchange and so they don’t have broker in between, eating their profits and so they can spot arbitrages much earlier than us. By earlier I don’t mean time early but price early.
It does not mean that retail investor cannot trade in arbitrage and circuits are best opportunities for arbitrage where if you have stock in your DP and if it hits circuit in both the exchange, you can opt to buy in circuit where the pricing is low and once the buy is executed, you can sell your stock from DP in exchange where pricing is higher than you just purchased. I did the same in Fame India here quite some time back.
Final Thoughts
Avoid spotting arbitrage in low volume stocks because pair trade execution can be tough in them. If you have any question about arbitrage, you can ask them in comments below.
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{ 43 comments… read them below or add one }
So what i understand from your article is that doing a manual arbitrage trading is not advisable. So can you suggest which software you suggest for this?
I have not used any software and so will not be able to suggest you something concrete but then if you plan to use softwares, you should be trading in the direct NSE window and not through brokers to avoid the brokerage. To trade in direct exchange, you need to have a trading portfolio of atleast 5 crore and after hearing about that amount, I was sure it is not for retail investors by any chance.
So that means a retail investor cannot do arbitrage??
Almost
Sir,
I work in GKN securities as an arbitrager..for the past 2 months..i work in NSE & BSE,i m confused,tht i used stand in BSE leg Or Nse leg…it wil be grt if u help me as i m new..
* tht i should stand in Bse Or Nse leg..
Amitesh, I am not able to understand your question.
We have this software name “Greek G.A.T.S.”,What Base i should kept while trading, NSE Base OR BSE Base?
Amitesh, I would suggest NSE but then even if you select BSE should not be a lot different. I am suggesting not based on software because I don’t use it but I think NSE has more trading stocks then BSE
Sir what if First i buy at BSE & sell at NSE & then reverse the deal on the same day is it possible or I still have to pay penalty of short selling.
If you reverse your shorts in any one exchange but keep your buy position open in the other exchange, you don’t need to pay the Penalty
So sir now for doing arbitrage one has to see the difference which can recover his 4 transaction cost and when book it then when prices are at common level reverse the deal nd get the desired profit without holdin any shares we can do that?
And that cannot be done manually. Never even try that
Sir one more question pls… I have seen in some shares that there has to happen a difference of 2 or 3 rs bt that price level do not come at par though the share price is around 150-200 why is that so
sir i wanna know about arbitrage bse and ase stocks.can u tell me how can i earn with arbitrage stocks.is it easy.thanx
No it is not at all easy and that is what I have explained in the article.
sir me arbitrege me kam karana chahta hu kya karu tell me plz email.send
What details should I email you?
sir, I have read ur articles on MFs…U advice to select best fund from each category, from midcap segment u recommend dspbr mid & small cap fund..but I want to know your opinion on the other categories..like large cap, large and midcap, multi cap…I want to select 5 funds and want to have some exposure to value oriented funds, I am going to invest in DSPBR midcap fund, but can you please help me to choose 4 funds from the below:-
1. franklin india bluechip
2. hdfc equity
3.quantum long term equity
4. DSPBR equity
5. Templeton india growth
6. Templeton india equity income
7. ICICI pru discovery
8.sundaram select midcap
9. franklin india prima
Ajinkya, I prefer not to spoon feed my readers and make their choices themselve because there is no rocket science in selecting the mutual funds.
Just follow one simple rule Choose couple of best fund in each category through ValueResearchOnline and select the one that you think would perform better in upcoming time based on their stock portfolio.
If I do them for you, you will be stuck yet again when re-evaluating them in few months time again.
thanx for your reply..I will do it myself…dont worry i will not held u responsible for any under performing funds…and according to me, if fund performs below its benchmark for 3 consecutive years then only we should replace it….I will select funds myself..just tell me whether I am on right track
1. large cap – franklin India Bluechip (excellent long term returns)
2. large and midcap – Quantum long term equity (very less churning raito, growth oriented, large cap bias)
3. Multicap – Hdfc equity
4. Midcap &small cap – DSPBR mid cap & small cap (investment approach – blend + ur recommendation!)
5. Multicap – Templeton india Equity income (value based approach with foreign equity exposure)
Perfect selection but also consider HDFC Top 200 fund as well.
thanx a lot! I preferred hdfc equity over hdfc top 200…just to avoid repetition of AMC, i have selected templeton india equity income and franklin india because though they are from same AMC, they are different in every aspect..R u suggesting that i should have hdfc equity and hdfc top 200 both in my portfolio?
what should be the minimum no of funds we should invest in? i think more than 5 funds is too much for SIP investment..what are ur views?
Hi Shabbir.
Thanks for the nice article. What do u suggest for a retial participant to make some profit thru arbitrage ?
Alex
Avoid is the best way Alex.
I had read this article before also. However, thank you for reminding the matter again.
Regards
B.Rajendra Babu
The pleasure is all mine.
dear sir,
its a valuable information.was there a possibility of arbitrge trading in REL.media works in recent past. Thank u
Ambika Mishra, it is impossible to check and verify that.
TO OPEN AN DEMAT ACCOUNT WHICH BANK IS GOOD PLS HELP ME OUT.
See http://shabbir.in/stock-brokers-review/ I prefer and recommend ShareKhan Online account but make sure you negotiate the brokerage for 2 paise, 20 paise or else it does not make much sense to go with them.
Shabbirji,
Thanks a ton for this article, In fact I was the one who had asked you for help.
Nagabhushan, the pleasure is all mine.
what does DP means??? Detailed porfolio???
No. It means Depository Participant where you can hold your shares in Digital form.
Check out http://www.sebi.gov.in/cms/sebi_data/attachdocs/1315461854747.pdf
oh acha.. That DP… Thnk u..
DP –> Depository Participant, with whom your Demat Account is hold.
Fund names or same fund house does not matter. Only thing that matters is past performance and future outlook.
Minimum is 1 and Max of as many as they help in diversification. I prefer 3 – Large Cap, Mid and Small Cap, Commodities fund and if I had to add one more it would be gold related fund.
Because the difference and the brokerage does not lead to arbitrage or else there are many big players who have softwares keeping track of such opportunities and punch auto trades
k thnx a lot sir
The pleasure is all mine Rakesh.