How does bid/ask spread and stock trading actually work?
- Monday Oct 26,2009 10:10 PM
- By diddy
- In Others
I’m a bit confused, if you want to buy a stock then the bid is the highest price that you would pay for it. So why is it then that when you actually purchase a stock you pay the ask price….? Also, how does the bid/ask spread really work and how do the market makers make money?
Bid Ask, Buy A Stock, Buy Stock, Market Makers, Money, Purchase Stock, Spread Trading, Stock Trading
4 Comments
I dont understand the source of your confusion. When a stock holder wants to buy or sell a stock they can specify a price by putting in a limit order. The "ask price" of a stock is the lowest price that someone is willing to sell it for. The "bid price" is the highest price someone is willing to pay for a stock at a particular moment in time. The market price is the price paid for the most recent stock trade. If a stock is trading at $10 and you put in a limit order for $9, the order will stay open until someone is willing to sell you the stock for $9. otherwise the order will never execute……….. the same is true if you wanna sell your stock…. your order will never execute until someone is willing to pay the price your asking….. i dont know what you mean by "market maker" … but stock holders make money through dividends and by selling stocks at higher prices than they paid for them…..
A market maker is a firm who quotes both a buy and a sell price in a financial instrument or commodity, hoping to make a profit on the turn or the bid/offer spread.
Also you may not necessarily pay the Ask price. If you put a bid in, the seller may lower his price to your Ask price. The sale will then be completed at your Bid price.
Bid is always the sell price, Ask is the Buy price. However many stocks can trade on multiple markets at the same time and the spreads can vary depending on the volume of shares traded on a daily basis. You can put in a limit order to purchase a stock at the "bid" price and either you can be filled when the price comes down and that price now is the Ask price ( the bid will still be lower) or you may never see it ticket there, but you could be filled away from the market by crossing orders through multiple traders. The market makers buy stocks and accumulate them hoping to make the difference between the Bid and Ask. only a few cents at a time, but they may trade millions a day and multiple stocks. That is how they make money. That does not include any commissions you pay at any firm. Good luck
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Good luck!
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