Arbitrage VS Speculation

#3 – What is the Difference in Arbitrage and Speculation?

Those who dabble in the markets are there to make a profit. Whether they trade alone or work for institutions unless they are a total greenhorn, they follow some tailor-made marketing strategy that performs well for them after a good amount of time, practice, and heaps of patience.

Two different types of financial trading strategies are – Arbitrage and Speculation – and both result in distinct degrees of risk of loss or gain opportunities.

Arbitrage

Arbitrage is a popular form of trading and generally with institutional investors and hedge funds. It most often carries a minimal amount of risk. An Arbitrage Strategy most often involves significant security, asset, commodity, etc., which is traded in two separate markets with a pricing difference. The “asset” is bought at a low price then sold for a higher price in another market. This difference in prices yields a profit to the investor. More times than not, this type of trading strategy is used more by the more prominent investors and players.

Arbitrage opportunities occur when a market shows a discrepancy in the price falls lower than it should be due to some carelessness or mismatches in pricing. For the most part, these erroneous prices are short-lived, so taking advantage is essential. (A bit difficult to do if the trader isn’t watching the markets, right?)

Conversely, Speculation doesn’t require a tremendous amount of asset stake and is not likely based on the market forces. Speculation is positioned more on conjecture and could be comprised of any asset in addition to real estate. While the gamble with Arbitrage trading comes with a limited amount of risk, Speculation spurs a greater fortuity of reward or loss.

An Arbitrage is, in essence, a type of hedge since concurrent buys and sells take place and comprise limited risk if done correctly. We should be aware that “limited” doesn’t always mean minor. Such things as the devaluation of a currency and fluctuations in prices could increase the risk, so traders need to keep this in mind to increase the odds of better and higher profitability.

Arbitrage traders ordinarily deal with large amounts since they are pursuing profits from slight pricing variations. Because of these more significant positions, single traders don’t often attempt to engage in Arbitrage trading. You will typically find hedge funds and large corporate investors in Arbitrage trading.

Speculation

The reward of gain is the driving force behind Speculation trading, although it does carry a considerable risk of loss. But then, if there were no expectation of profit, Speculation would not be a thing. Speculators operate on hunches and assumptions and read the market reports to stay on top of their trades.

Without Speculation, the market would be without liquidity. Traders would be limited to few producers, and the bid-ask spread would widen and make it very hard to find buyers and sellers within a market.

Investing and Speculating are very similar. There are differences, however. If someone were to purchase a house with the intention of the property being his primary dwelling, this would be considered investing. However, if the home was purchased with the intent to sell it quickly for profit, it now becomes Speculation.

Speculation is not confined to any one market or asset. It could include bonds, commodities, currencies, and even derivatives and real estate, as mentioned in the above paragraph.

Speculators in cryptocurrency markets earn from buying low and selling high to turn a profit.

No matter which type of trader you are, the name of the game is profit. This is what keeps us going and growing. Knowing how to trade is paramount to survival in the markets. Knowing and doing can be two different things. It is best for our financial stability to leave some things to the professionals.

About the author

Born in Illinois and the third oldest child of 10 children. Gail learned many lessons in life that would serve her well in her future. Patience, sharing, compassion, understanding, love, and acceptance were a way of life. Family is significant to Gail as a mother of three herself.
Gail lives by the motto "live and let live," and she takes pride in helping others. Educated, yes, but believes life is the best teacher and learning depends highly on an open mind.

Comments

  1. That’s a great explanation of those two trading positions! Out of the two, I’m personally more comfortable with the Arbitrage model, and I guess it could be equated to “playing the long game” when it comes to the trading world. I can see how this could be extremely lucrative, using the automation of trading software and smart traders. On the other hand, Speculation definitely is more of a “whale’s game”, and as you noted, much needed for liquidity (as we’ve seen in the rapid rise of Bitcoin/other cryptocurrencies once the “big guns” finally starting jumping aboard the bandwagon).

  2. a very good in depth blog posting and when you read it a couple times –you realize just how different both are — each morning we wake and speculate in all honesty — and as each moment continues though each day what do we call it ?? now with Arbitrage available we must honestly be truthful and see the difference and utilize that to our benefit — and seriously — does like and appreciate this posting very much so —

  3. Thank you Gail,  for explaining the arbitration and speculation trade in detail,It has often been observed that in speculative trades, if the prices are too high, the stock is removed from the market in order to make more profit by reselling in the market when the prices fall, but there is also a risk of loss.
    Arbitration is more profitable because investors can make huge profits by buying and selling two different things from the market at the same time,different cryptocurrency exchanges in arbitrage trade take advantage of price fluctuations.

  4. Arbitrage. It’s amazing as to how small scale traders wouldn’t venture into arbitrage due to the significantly high speculation of loss that it presents. Unlike Speculation that foresees better rewards due to the capability of reading the market before placing certain trades in the market. Yes, it does also have its considerable risk of loss but the good news is that it can surely be avoided with good market analysis. Indeed Gail, the name of the game is PROFT!! That surely does keep us going and moving upwards always.

  5. This is one topic I actually thought I’d never embark on. Arbitrage and speculation is a totally new spectre of information that I’m grateful for Gail. What has really captivated my attention is on the basis of how Speculation works. I’ve seen it taking place once in a while in stock, indices and commodity markets but I really never knew how it goes about. Can be risky but when done right the rewards are sweet!

  6. Thank you, Gail! That does help explain the differences. I don’t feel drawn to trading in general. I can do trades and be careful to keep our company’s assets up. But I don’t enjoy watching the market and get pretty confused with the various prices. If I wanted to do a lot of trading, or wanted a lot of trading done for me, I would definitely use a VA.

  7. Thank you Gail, for rounding out our information on trading – what’s the difference between arbitrage vs speculation? Even though I am considering using a VA, this is valuable for me to learn so I have a better knowledge of what my VA will be doing in the trading realm and would be able to ask some questions! Yes – to leaving to the professionals for me, like you suggested!

  8. When planning for my Virtual Assistant one of the task that I would require is for them to perform “Arbitrage” Trades. I would like my Assistant to trade “compuceeds” for “Blinc” first amongst other assets. I’m sure Speculation will also be required /applied in order to grow my assets,for this is the reason a paid professional VA is required for me.

  9. Once again, Gail, you have given us food for thought relating to trading. Although I do not, at this time, expect to need to know all of the nuances of trading, I do like getting more familiar with the terms and expectations of the market. It is interesting getting more familiar with terms that are new to me.

  10. Thank you Gail for the information and explanation of what Speculation and Arbitrage are. I am grateful for the knowledge but I expect to have a VA if There is any trading to be done on my part. The only thing I might do and that is to invest in real estate because I am interested in helping others by making it more affordable. I am hoping that Compumatrix will help me in my plans.

  11. Amazing topic Gail. This blesses me on the basis of Arbitrage and Speculation. I’ve done some amount of day trading here and there trying out something new especially during this time of the pandemic. I really didn’t know anything about Speculation and analysis till I read this blog. I’ve made my losses in the past but no more! I concur with you that learning to trade and analyse markets is paramount to survive and stay on top of the food chain especially in the markets. Thank you Gail.

  12. Thank you very much Gail for a very nice Primer on Arbitrage and Speculation.As you pointed out you have to be alert watching different markets and finding the differences in prices to take advantage of Arbitrage.Thus it requires presence of the person involved in Arbitrage to be able to execute the orders in resultant profits.option trading will most likely fall under the heading of Speculation.,

  13. Again nice job Gail. Arbitraging needs plenty of market knowledge information for it to work. Speculation carries a lot of risk generally, however if you hold a diversified portfolio in terms of asset types spread over different geographical markets, you can lower your trading risks considerably and generate profits in the long term.

  14. Again Gail. BAM! Right on the money. Have done many sets of Arbitrage in my life, form sports betting (It’s amazing the differences in offs bookies give – Meaning if the right bets are placed with the right bookies – it’s a win all around – Legal in the UK) to gold and silver to crypto. Something that can be taken advantage of is several places.

    And we all do speculate. We speculate on what our house is going to be worth in 10 years, we speculate on a crypto and HODL hoping it’s all going to go the way we want it to. Lately, That has been a good thing.

    Thanks for the post Gail. Excellent.

  15. Thank you for clarifying these positions. I would probably prefer the arbitrage model as it seems to work better in the long run. But for this, of course, it is better to use automated trading with the help of various robots or find a qualified trader. As for the speculation strategy, I don’t really like it, although it can be profitable.

  16. I speculate that profiting from arbitrage may land an albatross around my neck. I can see the excitement in landing a significant profit. I must be realistic and know the funds to create a trading bonanza is not available to me at this time. Maybe down the road, this can occur. A professional or a thoroughly trained VA is the road I will travel for now. The wisdom we have gleaned from your blog, Gail, is priceless. It is much appreciated.

  17. I think every member followed the “Speculate to accumulate” thought. We all hped that by investing we would achieve gains Looks like it was a good decision.

  18. More valuable information from Gail to clarify the differences between arbitrage and speculation. As most of us are aware speculation about anything can be a little dangerous at times but speculation in financial matters can be an absolute disaster. Certainly the use of a VA can negate any such disasters.

  19. Well Sophye we have been speculating on Bitcoin, for some time now, right? I do know about how large investors will take a very small move or variation in a stock, or investment and when you are working with a million shares that turns out to be a lot of money; but they also hedge or protect their trades by using other trades to offset any possible losses. This take a lot of savvy, understanding and knowing the markets or investment such as real estate. But, I do like speculating on stocks and commodities after watching the charts for a while and I see a big dip; such as heating oil, where you buy an option on 52,000 gals of oil. It only takes a rise of $1.00 to make some decent money

  20. Thank you Gail for this wonderful article and educating us about Arbitrage VS Speculation. This has enhanced our knowledge and we have certainly learnt a lot about what is the difference between Arbitrage and Speculation to be able to judge the difference between them.

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