Arbitrage – or Buying-to-Sell

Prior to Brexit, I had intended to buy a few hundred dollars in British Pounds as an investment.  Unfortunately, my day job got in the way and I never got around to it.  Fast forward a week and the Pound dropped 11% against the U.S. Dollar.  I could have made a nice little profit converting those pounds back to dollars.

The pound has rebounded slightly since then but there’s still the possibility of further gradual declines.  I might still pick up a few hundred (though less than before) and wait for the markets to settle.

My credit union sells foreign currency via Travelex, one of the premiere currency services in the country, albeit at a lower price to its members than you can get directly through Travelex.  Savvy investors know that one of the keys to investing is to buy commodities for the lowest price possible.  That will allow you more options to sell later for a potential profit.

This is especially true with currency as banks and business like Travelex will sell you currency at a higher exchange rate than they’ll buy it back from you for.  As of today, $100 USD will buy you $66.28 GBP.  However, Travelex will convert that same $66.28 GBP into only $80.78 USD.  That’s a loss of $19.22 per $100.  Therefore you’ll want to find the lowest value/cost for Pounds and the highest value/cost for Dollars even if that means using 2 different institutions to conduct both ends of your business.

A friend of mine has a very nice business purchasing dozens, if not hundreds, of an item at incredibly low prices only to flip them on Amazon Prime for a healthy profit.  Last year he made over $10,000 on Black Friday alone.  Granted, this is his only job and he spends a lot of time (and money) on the computer every day seeking out opportunities on websites like slickdeals.net.

This flipping of goods for resale is called arbitrage.  According to Investopedia.com, arbitrage is defined as,

the simultaneous purchase and sale of an asset to profit from a difference in the price. It is a trade that profits by exploiting the price differences of identical or similar financial instruments on different markets or in different forms. Arbitrage exists as a result of market inefficiencies.

Deals can be found anywhere – Craigslist, eBay, Slickdeals, retailers’ websites (especially on Black Friday and Cyber Monday), in-store closeouts and discontinued items.  You just need to know where to find them and have the time, money, and patience to ride out the wait until you can sell.  Thanks to my friend I scored a discontinued X-Box Kinect for $45 and flipped it on eBay a few months later for $125.  That’s an $80 profit.  Multiply that a few dozen times each week and you have my friend’s business.  And that, my friends, is arbitrage.

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