Definition: The difference, in cents, between the highest bid among potential buyers of a stock and the lowest price being asked among potential sellers of the stock.
Example: The potential buyer willing to pay the most for a stock has bid $43.95 for each of the 100 shares she’d like to purchase. The potential seller asking the least for his 100 shares is willing to sell them for $44.00. The spread is the difference, or $.05. It also represents how close we are from having a meeting of the minds and a sale from the seller to the buyer.
Investeach explains: Generally speaking, the larger the company, the more buyers and sellers there are at any one time. There’s a greater chance that one or more of those potential buyers will be willing to pay a little more and a potential seller or two will be willing to take a little less. This results in a smaller spread. A small spread and lots shares being bought and sold each day are characteristics of a company with high liquidity. On the other hand, smaller companies whose stocks trade less frequently are likely to have a higher spread.
Finally, an offer to sell stock is made through the entry of a sell limit order with one’s stock brokerage firm. An offer to buy stock is made through the entry of a buy limit order.
Riddle me this:
1. How do we determine the spread?
2. Why do larger companies have a smaller spread than smaller companies?
3. What type of buy and sell orders do we look at to determine the spread?
Related terms: Limit buy order, Liquidity, Limit sell order.