What does 'arbitrage' involve?

Arbitrage involves the simultaneous purchase and sale of an asset in different markets to profit from price discrepancies. This practice takes advantage of differences in the asset's price in various markets, allowing traders to lock in risk-free profits. For instance, if a security is priced lower on one exchange than another, a trader can buy it on the cheaper exchange and simultaneously sell it on the more expensive one, realizing a profit from the price difference. This mechanism is crucial for maintaining market efficiency, as it helps align prices across different platforms.

The other options reflect different trading strategies or concepts but do not accurately describe arbitrage. Trading stocks during regular market hours does not capture the essence of arbitrage, which thrives on market inefficiencies regardless of time. Holding securities long-term is more aligned with a buy-and-hold investment strategy, focusing on value accumulation over time rather than exploiting price discrepancies. Finally, the strategy of buying low and selling high on the same exchange is a fundamental trading principle but lacks the simultaneous aspect across different markets essential to the definition of arbitrage.