Understanding Bid-Ask Spread Essentials (And its Significance)

Since my last investing 101 article was almost four months ago, it is long overdue. Today’s topic will cover an essential investing element: bid-ask spread. Although this topic might sound mundane at first, applying it could save hundreds – perhaps thousands – over your lifetime.

Before discussing the implications of bid-ask spread, it is necessary to define what bid price and ask price are. When purchasing or selling securities such as ETFs, bonds, or stocks you will see two prices listed; one being bid price while the other offers ask price.

Bid Price (or “bid price”) refers to the highest amount that a buyer is willing to purchase that security at; Ask Price is often referred to as an offer price). When bid prices meet Ask Prices, trading occurs.

Real-time trading prices change constantly during a trading day and these fluctuations might seem trivial; but they’re anything but.

What Is Bid-Ask Spread (BAS)? mes BAS can also be thought of as difference between ask and offer price or vice versa and why they differ (buy/sell spread). The calculation involves subtracting off both prices from both prices (usually asking price from Ask Price), which gives B/Spread.

Example: if Stock ABC has an Ask Price of $11, and Bid Price of 11.05., then its bid-ask spread equals $0.05 per share.

Though $0.05 per share might seem inconsequential, when trading thousands of shares it becomes significant and liquidity and supply and demand come into play.

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