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You're at a fruit market. But, instead of just being able to buy apples at this fruit market, you can also sell fruit.
You're not a farmer, so you come to the market to buy some apples and you see two fruit stands. Fruit Stand A on the left
is buying and selling apples at 50 cents apiece. However, Fruit Stand B on the right is buying and selling apples at 53 cents
apiece. People are buying and selling apples at these two stands all the time, and the price at a stand could change at any
moment. But, while you're there, apples are 50 cents and 53 cents, respectively.
You're a smart person, and you quickly
realize that you can buy apples from Stand A and then sell them across the street to Stand B and make a 3-cent profit. But
you have to do it now; you can't wait. So you buy all the apples at Stand A and then run to sell them all to Stand B.
Congratulations.
You've committed fruit-stand arbitrage.
Arbitrage is exactly that: the selling of the same item between two different
markets to make a profit off the mathematical differences in price. However, it's not apples that are traded--the goods in
question are usually stocks, currencies and other securities. Arbitrage happens when you get a stock, usually a common one
like General Electric that's traded on multiple markets (Japan, Hong Kong, U.S., etc¿). The stock is usually worth within
fractions of a penny the same on each of those markets. However, there are often some minor variations.
People who
participate in arbitrage take advantage of these variations--and make a ton of money doing it. As seen in the fruit stand
example, you can make a "riskless profit" from buying and selling apples between different markets.
There are some
big hedge funds that make almost all their money off arbitrage. But, despite this simple example, arbitrage is mathematically
complex--and involves a good portion of risk if you don't know what you're doing. You probably won't be able to participate
in arbitrage directly, but you can always invest in a mutual fund that does.
Home / Markets / Industries / Media
Wednesday, June 25, 2008
Three Reasons Why You Should Keep Your Truck
Jennifer Openshaw
MarketWatch
NEW YORK--With gas approaching $4.50 a gallon and your 6,000-pound SUV using a lot of it, you may lose sight of the big picture.
Don't.
We all make bad investments. We buy stocks with a solid rationale and expectations, and then they take a hit. The company announces a horrible quarter, say, and our long-term view goes out the window. We can't resist the urge to sell.
Now, I take today's gas prices seriously. High energy costs are probably here to stay and it's time to adjust. But if you already have that Suburban or F-250, be careful. It doesn't necessarily mean it's time to sell.
You see, vehicles aren't really like stocks. The total cost depends on how you use them, and there are lots of costs -- not just the gas. Much higher transaction costs, for instance. So it's a more complex deal. Really, it's a matter of running the numbers.
Avoid the impulse
You bought your truck for a reason. To haul a family, to tow a boat, to run your business. Or, maybe you just liked the solid, safe feel. Whatever. It's yours.
Now, what happens if you sell it and buy a more fuel-efficient vehicle? You'll save on gas. But you'll still need your checkbook:
Soft market. Used trucks and SUVs are abundant now. Dealers are offering next to nothing. According to some reports, trade-in values have dropped $5,000 to $10,000 in a few months. So take that hit, plus the depreciation on the new car? No thanks. Sales tax, at least in some states. That's perhaps $800 to $1,500 on a compact car.
Financing costs. Just like those home-foreclosure horror stories, you may be underwater on your current vehicle and have to take a check to the closing. Then there's the $365 a month to pay on the new car ($15,000 loan, 8%, 48 months).
All to avoid $4.50 a gallon? Not so fast.
The real deal
Your SUV or truck, let's say it gets 15 mpg. At 12,000 miles a year, that's 800 gallons of gas a year, or $3,600 a year. Now $3,600 is a lot, but compared those other numbers? Hmmm. Now suppose you're considering downsizing to a 25 mpg car. That car uses 480 gallons annually, or $2,160 in gas. So, all those new costs -- just to save $1,440?
The bottom line is:
Do the math. See how much you'd really save. Drive less. You can match that 25 mpg by limiting that SUV to 7,200 miles per year, or about 100 miles per week less. People are doing it; according to recent surveys, total miles driven in 2007 actually declined for the first time since 1960. So, car pool, use public transit, use your other car more, stop taking the kids to school - you get the idea. And you may be able to lower insurance costs by driving that big rig less, too.
If you find a bargain, act. If Aunt Maude is selling her five-year old Camry with 26,000 miles on it, maybe it's time to cut your losses. Again, run the numbers. Consider a scooter.
If you need a second car, consider a scooter. They get 100 mpg vs. about 20 for a car, a savings of literally thousands in gas each year, not to mention the insurance. Just remember: They generally make sense for shorter distances, such as short drives to work, a run to the grocery store, even a ride to school, as I did in my younger days.
It's just like with taxes. Don't spend (or lose) a buck to save 35 cents.
Jennifer Openshaw is co-founder and President of WeSeed and author of "The Millionaire Zone." You can reach her at jopenshaw@themillionairezone.com.
Copyright © 2008 MarketWatch, Inc.
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