Arbitrage opportunities always exist across various spheres in life. Just as an example, let's say you have an opportunity to buy a product in one city in India and sell the same at a higher rate in another city, it leaves you with an arbitrage opportunity.
It may happen across two cities or across two markets, including the stock markets.
How Arbitrage Opportunities Work In the Share Market in India?
In the case of share markets there exists plenty of opportunities as there is no perfect price discovery. Let's say you want to buy a company called A. You see that the price of the company is Rs 10 on the National Stock Exchange (NSE) and Rs 12 on the Bombay Stock Exchange (BSE). You buy the shares on the NSE and then sell the same on the BSE.
In real life this is a really rare phenomenon, because by the time the delivery of the shares come, the price tends to adjust itself.
Arbitrage opportunities are available for very short periods and as such you have to have an eagle's eye to spot the opportunity.
As mentioned earlier, the price tends to adjust itself really quickly, which is why you may lose the opportunity.
Another aspect to remember is that transactional costs including brokerage, adds to the costs and all the share arbitrage opportunity that exists would be lost in these costs.
Let's explain this with an example. Let's say you see an arbitrage opportunity in the share price of company C on the NSE and BSE. Say the price is Rs 100 on the NSE and it is Rs 103 on the BSE. Now, if you incur a brokerage and a Securities Transaction Tax and the cost works to Rs 102 and then you incur another Rs 2 to sell the same on the BSE the opportunity is lost.
It is therefore important to remember that you need to consider these costs before you buy and sell.
Why Share Arbitrage Differences May Exist?
Arbitrage costs may happen for a number of reasons. One is that share markets or stock markets are never perfect. What this means is that it is difficult to get the exact price discovery. For example, there maybe a desperate seller in the markets that leads to a huge price discovery problem.
In any case it is a short term phenomenon.