Free Stock Market Investing Tips

A basic issue most beginning investors and traders don’t understand is how to deal with the bid/ask spread. Quite simply, the “bid” price is the amount someone is willing to pay for a stock. The “ask” is how much someone wants if they will sell the stock.

Suppose stock XYZ has a bid of 15.05, an ask of 15.10, and a last sale of 15.06. If you want to sell stock XYZ right now, you could only sell it for 15.05 since that is the highest price someone will pay for it. Conversely, if you want to buy XYZ right now, you would have to pay 15.10, since that’s the lowest price someone will sell it at. The last price time a transaction occurred was at 15.06, so slightly above the current ask bid.

Most of the time, the bid/ask spread does not matter much. For large, highly liquid stocks (such as Microsoft, Google, GE, etc.), the bid/ask spread is often just just $.01. However, for smaller stocks, the bid/ask spread can sometimes be significant (.5% of the stock’s price or more).

If you place a market order, you are telling your broker to pay whatever the current bid/ask spread will get you. So in the XYZ example, if you placed a market buy order, you would pay 15.10 for XYZ since you instructed your broker to pay whatever is available.

For stocks with low volume (small cap stocks in general), it is often wise to use limit orders. For example, if you want to buy XYZ but don’t want to pay 15.10 for it, you could put in a limit order of 15.06. Here, you are saying you will pay up to 15.06 for the stock, but not a penny more. If someone wants to sell at that price, you will buy it, but you won’t pay 15.07 or more for a share of the stock.