Definition: Arbitrage is the profit making market activity of buying and selling of same security on different exchanges or between spot prices of a security and its future contract. Here exchange refers to the stock market where shares are traded, like the NSE and BSE.

Description: A stock is traded in multiple stock exchanges and on each stock exchange the quoting price may be a bit different. Hence arbitrage as a practice is followed to take advantage of the price disparity. Originally arbitrage occurred in the currency market, but now it applies equally in the commodity, futures and the stock market as well.

For example: Infosys is quoting at Rs 2750 on the BSE and Rs 2760 on the NSE. Hence one can sell the stock on the NSE and buy from the BSE at the same time. This trade will lead to a profit without any risk. This process is arbitrage.