Bid/Ask Spread
The bid/ask spread is the difference between the highest price that a buyer is willing to pay for a security (the bid price) and the lowest price that a seller is willing to accept (the ask price). This spread represents the market maker’s profit on each trade.
How it Works
When you buy or sell a security, you will encounter two prices: the bid price and the ask price. The bid price is the price at which buyers are willing to purchase a security, while the ask price is the price at which sellers are willing to sell a security. The bid/ask spread is the difference between these two prices, and it can vary depending on the liquidity and volatility of the security.
Impact on Trading
A wide bid/ask spread can make it more expensive to trade a security, as you will have to pay a higher price to buy and receive a lower price when selling. This can erode your potential profits, especially if you are trading frequently or with large amounts of money. It is important to consider the bid/ask spread when making trading decisions to ensure you are getting a fair price.
Conclusion
The bid/ask spread is a crucial concept in trading that can significantly impact the cost and profitability of your trades. By understanding how it works and monitoring the spread for the securities you are trading, you can make more informed decisions and mitigate the impact of trading costs on your overall returns.
