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Author: TMFSelena Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 2203  
Subject: Re: bid and ask prices Date: 5/26/1999 8:26 AM
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Here's an explanation of "Spread" that I prepared for our weekly newspaper feature -- it includes bid and ask prices.

Selena

The Fool School

The Spread

When you go to your local used car dealer to unload your beloved 1991 Schnauzer 900ZX, the dealer will probably buy your trusty heap for fewer dollars than he plans to charge for it. That's understood; the difference is his profit. Wall Street has a similar dynamic, and it's called the "spread."

The spread is the difference between "bid" and "ask" prices. The bid is the price that someone is willing to pay to buy a security, while the ask is the price at which a security is offered for sale. On exchanges such as the New York Stock Exchange (NYSE) or the American Stock Exchange (AMEX), spreads are relatively uniform, roughly one-eighth to one-sixteenth of a point (or dollar). So while you might be able to buy Lord-of-the-Trance Hypnotics (ticker: GLAZE) for $32 per share, its sale price might be $31 7/8. That might not seem like a big deal, but for every 1,000 shares traded, it amounts to $125. On an average day, more than 1.1 billion shares are traded in the United States. If the spread for each were one-eighth of a point, that would total $140 million.

Spreads serve as payments to those who keep the markets liquid -- brokerages and the market-makers from whom we buy and to whom we sell shares of stock.

Nasdaq spreads were often on the wide side, until regulations helped nudge them down more than 35 percent in 1997. Nevertheless, it's still smart to ask what the spread is when buying or selling any stock.

We're wary of wide spreads, as they usually flag volatile, infrequently traded or penny stocks, which we avoid. If a bid is $10 per share and the ask is $11, you're looking at a $1 spread, in this case equal to 10 percent of the bid. That means you start out 10 percent in the hole -- significant, when you consider that on average the market advances some 10 percent a year.

Spreads are unavoidable, but you can keep them from eating too much of your long-term savings. Limit their bite by not trading too frequently and by shunning infrequently traded stocks.
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