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.