Where to buy, where to sell?
If you are a first-time trader then you must have heard the terms bid-ask spread or spreads before but you may not know how they relate to the stock market unless you are an experienced trader.
The bid ask spread affects the price at which a sale or purchase is made. It also affects the overall portfolio return of an investor. This means that if you want to immerse yourself in the equities market, you must learn what this concept is about.
Demand and Supply
First of all, you must become familiar with the demand and supply concept before going further with the concept of spreads. Demand refers to the trader’s inclination to pay a specific price for a stock or an item and supply refers to the abundance or volume of a specific item in the market- the supply of stock for sale.
The Bid-Ask Spread
The spread is the difference between the asking prices and the bid for a specific financial instrument that represents some type of financial value.
Demand and supply determine the price of the stock and the spread’s size. The higher the demand from companies or individual investors to buy, the greater the amount of bids and this means that more sellers will result in more asks or offers. One important thing to note is that when a firm imposes a top ask or bid and an order hits it, then they must abide to their posting and the same is true for ask prices, too.
The bid ask spread is basically a negotiation in progress and therefore, if traders want to have the highest chances for successful trading then they must stay away from the bid-ask process and use limit orders instead. By executing an order without the concern for the bid ask spread and without having a limit, then traders are basically confirming someone else’s bid which subsequently creates a return for that person.
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This article comprises the personal view and opinion of the STO Investment Research Desk and at no time should be construed as Investment Advice. FX and CFD trading are high risk and may not be suitable for everyone, ensure you fully understand the risks. You may sustain a loss of some or all of your invested capital.
