facebookWhy is there a difference between the price which you pay for the stock and the price you receive of the stock? For eg. i pay $25.10 but my stock price is $25 due to this thing called bid ask spread? - Seedly

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Anonymous

22 Nov 2019

General Investing

Why is there a difference between the price which you pay for the stock and the price you receive of the stock? For eg. i pay $25.10 but my stock price is $25 due to this thing called bid ask spread?

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What are your thoughts?

Kelly Trinh

Kelly Trinh

22 Nov 2019

Level 11·Backoffice technical at financial services firm

Perhaps illustrating by your example will help:

If you don't have the shares and you want to buy - you are "bidding" a price (like an auction) - that is the "bid" price; it is going to be low coz you want to pay as less as possible

If you have the shares and you want to sell - you are "asking" for a certain price - that is the "ask" price; it is going to be high coz you want to make as much as possible
In a normal market there is going to be a small gap - this is the "bid ask spread". No transactions are happening because there is a gap in the price. For your example the bid is $25 and the ask is $25.10 for a bid ask spread of 10c (25.10 less 25.00)

Eventually someone will want to actually transaction - so they will "cross the spread" and pay the price the other side wants. So suppose buy side tired of waiting and will transaction at 25.10 - in this case both sides swap the shares at the price of $25.10 (note no gap - each side will receive 25.10 less brokerage)

Hope that helps and shout out if need further clarification.

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Bid-ask spread is the difference between the bid and ask price due to demand and supply respectively. in your case bid price is 25.00, and ask price is 25.10

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