what’s a bid – ask spread?

The bid – ask spread is the difference between the offering price and the asking price of an asset in the market. an example of this is…

Imagine that someone called Person A is selling a cell phone for $100 this is what’s consider the ask price. Another individual called person B like the cell phone and is willing to buy and pay $90 this is what’s consider the bid price.

$100 – $90 = 10

$10 is what’s consider the bid – ask spread

Another way to look at it is

Bid meaning buyer. So bid is the amount of money that the buyer is wiling to buy an asset.

Ask meaning Seller. So ask is the amount of money that the seller is willing to sell an asset.

The larger the gap is between them the larger is the spread. Therefore, the asset is low liquidity

The smaller the gap is between them the smaller is the spread. Therefore, the asset is high liquidity

Liquidity

Liquidity is something to keep in mind when buying and selling assets in the market. The liquidity is how fast you are able to buy or sell an asset.

A high liquidity mean that you are able to sell or buy an asset fast.

A low liquidity means that you are not able to sell or buy an asset fast , so it’s slow , it might take some time to find a buyer or a seller.

Example of Low liquidity

Let’s say there is an asset with a bid of 90.00 and the ask of 94.00, it has low liquidity because there are not many buyer and sellers competing.

the spread is $4

Example of high liquidity

Let’s say there is an asset with a bid of $100.00 and the ask of $100.04

the spread is 0.04 cents

It has high liquidity because there are lots of buying and selling trading and competing with each other.

Limit orders

A limit order is when you give the order to the broker to buy or sell an asset at a specific price.

Example

Let’s say that the current price of share is $80. you think that the current price might be overvalue so it might goes does down to $70.

You can set a limit order at $70 so when the price goes down, it automatically buys the share for you if it goes under $70

Market orders

Market order is when you are able to buy or sell an asset only at the current market value. This is good when you wants to sell or buy an asset right away, immediately.

Therefor when submitting a market order

for a buying order most likely you receive the lowest buying price

for the selling order most likely you receive the highest selling price

Fees

Sometime there are fees depending on the platform that you use to trade. Some brokers charge a fee and some don’t charge a fee.

In general

Low liquidity means higher fees, because the broker you are using charges a fee to help you execute the trade. So, low liquidity mean high spread

High liquidity means lower fees, because the broker you are using charge lower fee, since broker does not need to help you to execute the trade , so high liquidity means low spread