Understanding Bid-Ask Spread

Author: George Davis

The buying and selling in the stock market take place through the bid-ask spread. If you are new to investing, read this blog post to learn all about the bid-ask spread.

The bid-ask spread is the difference between the selling price and buying price of stocks. This difference usually arises due to the forces of demand and supply. Unlike conventional transactions, the bid-ask spread is a bit different in the stock market. If you are new to the investing world and looking to understand the bid-ask spread, you are in the right place. In this blog post, we will explain bid-ask spread and everything else related to it. So, keep reading to learn more.

What Is the Bid-Ask Spread?

In a perfect equilibrium market, there are two main forces – buyers and sellers. The bid price is the highest amount a buyer is willing to pay against a particular asset, and the asking price is the lowest amount a seller is willing to accept against a particular asset. The bid as the spread is often represented in an order book, and investors keep a close eye on this because this price setting keeps changing over time.

Plus, the bid-ask price is a facto measure of market liquidity. If the bid-ask spread is small, the stock market is highly liquid because the buyer and seller are closer to agreeing on a price.
Understanding Bid-Ask Spread

A stock’s price is the market’s perception of its value at a given time. To understand the bid-ask spread, you should recognize two crucial market players – price takers and market makers. Market makers are often employed by the brokerage firm. These people offer to sell securities at a given price and buy them as well. The difference between the buying and selling of securities is the commission earned by the brokerage firm.

The bid-ask spread is either small or wide depending on the value and market reputation of a particular stock. If a company is facing substantial losses and has bankruptcy rumors, the sellers would demand a nominal price, but the buyers would offer to buy at cheap rates.

Moreover, the bid-ask spread contracts when the share has high demand and the company has a good reputation. This is a market liquidity position, but the situation doesn’t last long because investors quickly start buying shares so they can sell them at better prices. When the demand increases, supply prices go down because the buyer has plenty of options, and sellers start competing on price levels.

Concluding Thoughts

The bid-ask spread is a common market condition in the stock market. It is often reflected on the order book, and investors pay close attention to the changes in the bid-ask spread. Beginner investors have a hard time finding the best prices for their stocks. However, with years of experience, anyone can understand market trends and any stock’s future value.

Stock Picks

1. Macys, Inc. (M)

2. Winnebago Industries, Inc. (WGO)

3. First BanCorp. (FBP)

Find the top stock picks with guidance on when to sell, buy and further information by subscribing to the PT Premium Service in the Proficient Trader App