Tip: For an investor to make money on a security when they buy at the ask price, the bid price for that security must rise to a level higher than the price at which they bought. The $1 of profit leakage reflects the $1 bid-ask spread on this stock. The investor's profit per share is $2, even though the stock price rose by $3. If the investor decides to sell their shares through a market order, they will receive $103. Thereafter, let's assume that the stock rises 3%, where the bid price moves to $103 and the ask price moves to $104. If an investor places a market order on this stock, they will purchase the stock at $101. For example, consider a stock with a bid price of $100 and an ask price of $101. It's important to understand how the bid-ask spread impacts trading profits. If an investor places a market order to buy 1,000 shares of a stock, and the ask price is $110, that's the price the trade will be executed at. Market orders are filled at the best obtainable price. There are several types of orders that can be placed, although the most basic is the market order. If these 2 orders represent the highest bid and the lowest ask price in the market, the spread on this stock is $1. Let's assume another investor has placed a limit order to sell 1,500 shares at $101. Ask Spread Exampleįor example, let's say an investor wants to buy 1,000 shares of Company A for $100 and has placed a limit order to do so. On the other hand, when the bid-ask spread is wide, it can be difficult and expensive to trade the security. Having plenty of liquidity means it is much easier to buy or sell the security at a competitive price, especially if the order size is large. It's referred to as a "narrow" bid-ask spread. When the bid price and ask price are very close, it means there is plenty of liquidity. Supply and demand play a major role in determining the spread. ask price varies depending on where the option stands. When investors talk about the bid-ask spread, they are often referring to stocks, but the same terms are used when trading other securities like bonds and options. Tip: The bid-ask spread represents the gap between the highest bid price and the lowest ask price for a certain security, at a given time. If buying demand exceeds selling supply, then often the stock price will rise in the short-term, although that is not guaranteed. The market sets bid and ask prices through the placement of buy and sell orders placed by investors, and/or market-makers. Bid-ask spreads can be as small as a few cents or larger than 50 cents or $1, depending on the security that's being traded. The difference between the bid and ask price is called the spread. Ayo888/iStock via Getty Images What Is the Bid-Ask Spread?
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