Spread
How is it That Someone Always Buys Or Sells My Shares of Stock?
If you’ve ever bought or sold stocks or currency you’ve probably noticed a bunch of different prices on the screen or from your broker.
The spread is the difference between what the “market maker” is willing to pay for the stock and what they are willing to sell the stock for. This is what the market makers do to make their money buying and selling stocks and what we gain is someone always being there to buy or sell are stocks. This spread is regulated so that it can’t become manipulated and they make too much money for their service.
To figure out what the spread is for any given stock pull up this screen on your chosen broker or free service like google or yahoo. The bid price is what the maker is willing to pay for a stock. In the case above it is $329.50 per share. The ask price is $330.80 per share. This is what the makers are willing to sell the stock for at the exact same moment in time. In this example the spread would be:
[Ask] – [Bid] = $330.80 – $329.50 = $1.30
When you’re looking at a spread you want to be careful of what percent you are paying to buy or sell the equity not just the overall amount. In this example it is $1.30 / $330.80 = 0.39% . If you are long term investor this percentage loss should be very small compared to your expected returns. However, if you are a trader this is a very important factor to consider in your risk reward analysis. If your overall goal is 0.5% on the trade and the makers want 0.39% you have a much bigger hurdle to overcome.
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