A bid-ask spread is the difference between what buyers of a security will pay and what sellers will sell at. The bid-ask spread can be affected by a number of factors including the number of shares available on the market. During volatile trading times, the bid-ask spread can also fluctuate greatly. This type of spread is present in many financial markets, such as the stock market, the Forex market, and the commodities market.
Many times, when individuals look at a stock or another security on a trading platform, they will see two prices quoted. They will see a smaller price and a larger price. The higher price is the price at which buyers will have to buy the security. The lower price is the price at which sellers will be able to sell their shares.
The difference between the two prices is usually kept by the broker. In some financial markets, such as the Forex market, this is the only way the broker is compensated. This means that traders want to see low spreads because it means that they are saving money on transaction costs.
The bid-ask spread size can be affected by a number of factors. One of the most common factors is the number of traders available in the market. When a limited number of shares and traders of a stock are in the market, it can drastically increase the size of the spread. The sellers of the security may be wanting one price while the buyers want a completely different price. If there are a limited number of buyers and sellers in the market, it can drastically affect liquidity and make it more difficult for buyers to benefit from competitive spreads.
When the market is extremely volatile, traders will also notice that the spread can fluctuate greatly. In many cases, brokers will have larger spreads as a way to compensate themselves for taking on added financial risks. When markets are extremely volatile, the price of securities can move extremely fast. This means that brokers have to increase the spreads to avoid losing money on a transaction between a buyer and a seller. Traders may want to avoid trading in uncertain markets because of the increase in spreads.
