How to Make Money from Arbitrage between BSE & NSE?

Welcome to a channel dedicated to Indian traders and investors. In this session, we will show you how you can make money from arbitrage opportunities between stock exchanges. But before we get going, don’t forget to subscribe to this channel.

Now let’s get going. Arbitrage trading is the simplest form of trading strategy. In the Indian stock market, there are 2 main ways of arbitrage trading. One is between stock exchanges, i.e. BSE and NSE and the other is between futures and cash market.

In this session, we will focus on arbitrage between stock exchanges and see step by step, how to take advantage of arbitrage opportunities between BSE and NSE. We have made another video on arbitrage between the futures and the cash segments. Don’t forget to check that out as well. First, let’s understand what is arbitrage.

So you go on a vacation to Dubai and there during one of your shopping sprees, you come to know that gold, i.e. pure 24 karat gold is being sold at 30,000 rupees per 10 grams. Now, you know that in India, gold is trading at about 35,000. So you get an idea and buy 100 grams of gold worth 3 lakh rupees from Dubai.

When you come back to India, you sell that gold at a local shop at the rate of 35,000. For that, you get three and a half lakh rupees. So in this little business venture, you made about 50,000 rupees. This is called arbitrage trading. When you buy the same product at a cheaper price from one shop and sell it at a higher rate at another shop.

Now, let’s talk about arbitrage between stock exchanges. As, you know, there are 2 major stock exchanges in India, BSE and NSE. A lot of companies trade on both these exchanges and for the most part, their stock prices are the same. So if you want to buy shares of big companies like Infosys, you can either buy from BSE or buy from NSE.

The price would be exactly the same, else, maybe just a little different. However, for relatively smaller companies, the price differential between these exchanges can be significant. For example, the shares of a company called PODDAR housing are trading at around 500 rupees on NSE and around 460 rupees on BSE.

There is about an 8% difference between the 2 prices. Now, as we saw in the case of gold, gold is gold and it doesn’t matter whether you’ve got it from Dubai or India. In the same way, the shares of these companies are the same and it shouldn’t matter whether you got them from BSE or NSE. So there right in front of you is an arbitrage opportunity to buy it from BSE and sell it NSE. But there is a little problem. If we just tried to place these two orders, it will not work. Why not?

Well, I have explained that very clearly in the video link below, do check it out if you haven’t already. Now let me tell you exactly how you can take advantage of this arbitrage opportunity.

Arbitrage between exchanges has to be planned out in advance and here are the 3 steps required for that preparation. The first step is to make sure that you have 2 trading accounts. Technically speaking, it can be done through one account as well, but not every broker supports that. So we will stick to 2 accounts.

So let’s say the 2 accounts are Zerodha and Sharekhan. The second step is to find the stocks where these arbitrage opportunities are frequently available. You can find these stocks on the screener of Moneycontrol.com. As you can see, this screener does a good job of spotting arbitrage opportunities. The link to this scanner is in the description below.

Now by selecting which stocks to pick from this screener, follow these guidelines. First, check the liquidity of the stock. You should be looking for stocks with good liquidity. Next, never pick penny stocks. That is stocks that are trading below 20 to 25 rupees. The problem with these stocks is that the opportunity looks much bigger than there is and a lot of times they are operator driven or manipulated stocks.

Lastly, the stock that you pick should be that of a company that is stable and preferably well-known as you don’t want to be buying a stock of any junk company that will go bankrupt the next day. So once you have done their due diligence of picking a stock for arbitrage, you will go to step 3, which is to buy the shares of this stock.

At this stage, we are not doing any arbitrage. We’re just getting ready for arbitrage. It doesn’t matter which stock exchange you buy the shares from, at which price you get it and from which account you buy. You just need the shares of this company to be ready for arbitrage. So let’s say I buy 100 shares of PODDAR housing from a Zerodha account and after 2 days these shares will be credited to my Demat account. By the way, I’m using PODDAR housing as an example and hence don’t start blindly trading this stock.

Once these shares are credited to my account, I’m ready for arbitrage trading and it’s time for execution. So from here onwards every day, you should keep checking for arbitrage opportunities in your stock.

One of these days, you will see that the stock that shares you bought are giving a great arbitrage opportunity. In my case, it’s trading at 462 rupees on BSE and 500 rupees on NSE. The price difference is over 8% and the greater the difference in the price, the bigger is the arbitrage opportunity. So how can we make money from this opportunity?

Now, pay very close attention to the next few steps because they are very important. The first thing that you have to do is to sell those shares that you bought on the exchange that has a higher price. So I will sell the 100 shares I have in my Zerodha account on NSE, which is offering the higher price of 500 rupees.

At the same time, from the other account, you have to buy the shares of the company from the exchange that has the lower price. So in my case, I will buy 100 shares of PODDAR housing from BSE at 462 rupees from my sharekhan account. The bottom line is that you sell the shares at a higher price and buy them back at the lower price.

Take a moment to understand this, because if it did you just made money from this arbitrage operator. Your profit would be selling price minus buying price. That is a 500 minus 460 multiplied by the number of shares, which is 100 shares in my case. The gross profit is hence 4,000 rupees. Of course, you have to account for brokerage and other charges.

Let us say you paid about 100 rupees in charges and hence your net profit will be 3000 rupees. What about the next time you spot another arbitrage opportunity? You have to follow the same steps. Sell the shares that you have at the exchange that has a higher price and from the other account, buy the shares at the lower prices from the other exchange.

You can keep doing this as many times as you want. I hope that you got the basic concept of how arbitrage works, but if you got confused at any step, don’t hesitate to ask questions in the comment section below and my team and I will clarify any doubts you might have. Now, there are some important points you should be aware of.

First, you have to realize that, for arbitrage trading, your capital gets blocked. That is because at any point in time you need to have the shares of the company in your Demat account or else you cannot do arbitrage trading. So that money that you used for buying the shares of the company is blocked and it’s not earning any interest.

It better provides you superior returns from arbitrary trading, else it will not be worth it. The second point that you should not ignore is the brokerage and other charges on every transaction because they eat into your profit. So whatever you can do to keep your brokerage down, do it. The third point is about the lack of liquidity in these stocks.

Now sometimes there’s is an arbitrage opportunity, but there are not enough buyers or sellers to transact the price. So you may execute one side of the trade from one account, but the other side of the trade may still stay pending or may not get executed. So make sure that the stock that you’re picking for arbitrage has enough liquidity.

The fourth point is that the arbitrage opportunities stay for a very short period. So you have to act quickly and be in front of the monitors all the time or else you can also code an algorithm to take advantage of this automatically.

Let me tell you something from a practical experience. I had an opportunity to visit a firm in Mumbai that does this kind of arbitrage trading. About 20 guys were sitting in a room and they all had this special software telling them which companies had the arbitrage opportunities and then bought and sold the shares of this company all day long.

The owner of the firm explained that to me, that it made sense for him to do this because he was also a broker and he doesn’t have to pay any brokerage or stamp duty. Also, they undertake thousands of trades every day because arbitrage is a low margin, high volume business. If you are considering arbitrage as a serious way of making money, make sure your cost is down and have a broker that charges very low brokerage fees.

I hope that made sense and don’t forget to check out the video about arbitrage between futures and the cash market.