The difference between the bid price and ask price of a market asset is called the bid-ask spread. Furthermore, it is the differential between the highest price the buyer is willing to pay and the lowest price the seller is ready to take. The seller receives the bid price while the buyer gets the ask price.

Tell me more about bid-ask spreads.

Two people are involved in a trading transaction: the trader or price taker and the market maker or counterparty. Market makers sell securities at a specific price called the ask price and bids to buy securities at a particular price or bid price. Traders need to agree between these two given prices depending on whether they want to buy or sell.

The bid-ask spread

The spread is the difference if you subtract the ask and bid price. Other than commissions, this is how most brokers earn their fees when they process the orders. Others may say that they do not charge anything, but, in reality, there are hidden charges. Fiatvisions has a decent and honest spread in the market. Hence, when we talk about the term “crossing the spread,” this is what we are talking about.

Aside from the things we mentioned, the bid-ask spread tells us a lot about an asset’s supply and demand. A bid can stand for the demand while the ask can stand for the asset. As these two go further away from each other, the price action becomes a reflection of the supply and demand changes.

Wide bid-ask spreads?

The depth of the bid price and ask price have a significant effect on the spread. The spread widens when:

  • There are lesser people who place limit orders to buy security because there are lesser bid prices.
  • There are lesser people who place limit orders to sell.

So, always consider the bid-ask spread before a buy limit order to ensure that it will have a successful execution. Market makers can also widen the bid-ask spread since they know risks in the market. Some of them will try to take advantage of clueless people. 

The bid-ask spread and liquidity

Every asset is different, especially in terms of liquidity. The bid-ask spread also tells us a lot about how liquid an asset is. The lower the spread, the higher the liquidity. Market makers provide liquidity for price takers who demand it. The world’s most liquid asset is currency since it has the smallest bid-ask spread (a percent’s one-hundredth). On the other hand, stocks with small capitals are not that liquid.

What are we looking for in a bid-ask spread?

Ensure that the securities you are getting involved with have the best bid-ask spreads having high liquidity. Ensure that you have a plan to make the best exit so you go home with nothing but hefty profits. Finally, look for securities with supply and demand friction that will make a great spread.

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