Getting to grips with the bid offer spread

Julie Brownlee, Fsp Invest, 22 Sep. 2015

Tags: bid offer spread, bid, offer, market maker, investing in shares, share pricing, investing,

When you buy shares on the stock market, there is more than one price. This works via the bid offer spread.

So what exactly is the bid offer spread? And what difference does it make to you buying and selling shares?

Read on to find out more…

What is the bid offer spread?

The bid offer spread is the difference between the price you can buy a share at and the price you can sell a share at.

The difference between the two prices is where the people behind creating a market to trade make their cut. These are known as market makers.

What is the bid and the offer?

The bid price is what the market maker is willing to pay you to sell your shares to them. In other words, it’s what the market maker will bid for them.

The offer price is what you have to pay to buy shares from the market maker. The offer price is usually higher than the bid price. This allows the market maker to make a profit from the transaction.

What does the bid offer spread mean to you?

For the largest companies on the Johannesburg Stock Exchange, the bid offer spreads are usually very small. These shares tend to trade in high volumes.

Smaller companies tend to attract bigger spreads. This includes the likes of penny stocks. This is because smaller companies are harder to trade.

If you’re buying smaller companies, the bid offer spread can have a big impact. The price you sell the share at immediately after buying could be as much 10% to 15% less than what you paid.

If you opt to buy exchange traded funds (ETFs), there are also bid offer spreads to contend with. This adds to your cost of investing in them.

So there you have it. Getting to grips with the bid offer spread.

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