How does arbitrage benefit investors?

Arbitrage benefits investors by taking advantage of price differences in different markets. When an asset is priced differently in two or more markets, savvy investors can buy the asset in the market where it is cheaper and simultaneously sell it in the market where it is more expensive. This allows investors to lock in a profit without taking on significant risk. The principle behind arbitrage is that markets are generally efficient, and any discrepancies in pricing should be corrected. By capitalizing on these temporary inefficiencies, investors can enhance their returns.

The concept of arbitrage relies on the ability to execute trades quickly to benefit from these price discrepancies before the market corrects itself. This practice helps to maintain market equilibrium, as arbitrage activity typically leads to prices converging towards their true value.

Other options do not accurately reflect the nature of arbitrage. Long-term investments carry inherent risks, cash flow in investing typically comes with risk, and not all investments yield dividends. Therefore, understanding how arbitrage operates is essential for recognizing its role in market efficiency and profit generation.