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Bid and Ask Prices — The Spread
Stock spreads are determined by a stock’s bid and asked price. The bid price is the highest price a market maker will pay to buy a specific number of shares. The ask price is the lowest price at which a market maker will sell a specific number of shares. The operative phrase in the two preceding sentences is “specific number of shares.” This means that if you are attempting purchase or sell a large number of shares, you may not receive a uniform price for the complete number of shares that you are attempting to deal in.
A market maker is a brokerage firm that stands ready to buy and/or sell a particular stock on a regular and continuous basis at a publicly quoted price. Usually, the higher the number of market makers, the greater the stability in the price of the stock and the liquidity of the market therefore.
Generally, bid and ask prices are determined partially by supply and demand but more specifically by the availability of the stock at a particular price. In today’s high-tech trading universe, bid and ask prices change rapidly. Paying attention to bid and ask sizes (the amount of stock available from each market maker) and the volume of stock being traded, at a particular time, may provide more information about the supply and demand for the direction of the stock price. Spreads have narrowed because of the greater pricing transparency gained from access to real-time quotes. The result of having narrower spreads is better execution prices. A wide spread generally indicates an illiquid stock. A narrow spread indicates a liquid stock.
Please keep in mind that this information is being provided for informational purposes only. It is not designed to be complete in all material respects. Thus, it should not be relied upon as legal or investment advice. If you have any questions relative to the contents of this post, you should contact a qualified professional.
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