Stock broker jargon uncovered: What ‘bid-offer spread’ means

Julie Brownlee, Fsp Invest, 08 Jan. 2015

Tags: bid-offer spread, what is bid-offer spread, bid, offer, stock broker, investing, investing, buying shares,

If you’re new to investing, it can take a little while to get to grips with the language used by your stock broker.

One of the most common phrases you’ll come across is the bid-offer spread.

So what is the bid-offer spread? And what does it mean for your investments?

Read on to find out…

What is the bid-offer spread?

The bid-offer spread is the difference between the price you pay for a share and the price you can sell it for.

There’s a difference between the two prices. This is so the market makers, the people who create a market for you to invest in, make money.

What is the bid price?
The bid price is what the market maker will pay you to sell your shares to them. In other words, it’s the price they’ll bid to buy your shares.

So this is the price you sell at.

What is the offer price?
The offer price is the price the market maker will sell you shares at. In other words, the price you buy shares at.

The offer price is usually higher than the bid price so the market maker can make a profit.

The differences in a bid-offer spread and the impact of your investments

On the largest companies listed on the Johannesburg Stock Exchange, the bid-offer spread is usually small. Huge volumes of these shares trade every day.

But if you opt to trade smaller companies, such as penny stocks, the bid-offer spread tends to be higher.

This is because these companies are usually harder to trade. So if you invest in a very small company, the spread can be large.

It’s not just shares where the bid-offer spread applies. If you buy exchange traded funds (ETFs) for instance, you’ll also have to take this into account.

A large bid-offer spread adds to your initial costs when you invest in them.

So there you have it, what the bid-offer spread is.

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