Definition of The Spread
What does the term “the spread” mean when speaking about the stock market? What is the definition of the term “the spread”?
When talking about the stock market, the “spread” is the difference between the bid and the ask.
The “bid” is the price that you would sell a stock at, while the “ask” is the price that you would buy a stock at.
For instance, let’s say that YHOO currently has:
-a bid of $16.55
-an ask of $16.57
This would mean that if you wanted to sell stock at that moment, you could likely sell it at $16.55. If you wanted to buy, then it would cost you $16.57 per share.
The difference between the $16.55 and $16.57? The “spread”.
Back in the days of “fractional quotes” (decimalization has only come along in the past decade or so) and decreased liquidity, the “spread” could sometimes be fairly substantial, even in well-known companies.
For instance, back in the day, you may have seen a bid and ask like this:
Bid: 10 1/4
Ask: 10 3/4
So, if you wanted to sell, then you would likely get 10 1/4 per share, while if you wanted to buy, then you would have to pay 10 3/4.
The “spread”? Half a dollar ($0.50).
Nowadays, the spread between the bid and ask would likely be just a few pennies at the most. This narrowed spread is the main benefit of increased liquidity in the markets over the past 10 years or so - this narrowed spread benefits investors tremendously, as they are able to receive more money when they sell, and pay less money when they buy.
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