Bid and Ask Prices
The stock exchanges are the places where the actual setting of the stock prices happens. They are the places where bid and ask prices cross their ways and the exchange serves as the intermediary between the two.
So, as an educated investor you should be acquainted with the meaning of bid and ask prices.
Bid price is the price announced by the buyer at which s/he is willing to purchase a stock.
Ask price is the price announced by the seller at which s/he is willing to sell a stock.
The major role of the exchange is to coordinate the bid and ask prices of buyers and sellers. This service, of course, is not for free.
Bid and ask prices are never the same. In fact, the price announced by the seller (the ask price) is always higher than the bid price. As a result you are required to pay the ask price in case you have decided to purchase a stock and pay a higher price. On the other hand, if you decide to sell a stock you will have to receive the bid price, which is of a lower amount than the ask price.
The difference between ask and bid prices is referred to as the spread. The spread goes directly to the pockets of the broker or specialist who was responsible for the stock transaction. However, the spread is also used for the paying of other fees, not only the commission of the broker.
Unless you use specific market orders, it will be almost impossible to determine the price you will get as both a buyer and seller. This is especially true for the actively traded stocks, which are characterized by their extremely dynamic nature.
Even though the bid/ask spread eats up part of your profit its avoidance is not recommended since it has proven its benefits as a working system throughout the years.
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