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At CAPEX, we understand the difference between bid and ask prices, and believe that knowledge should be shared. So, we created this guide to provide traders and investors alike with a better knowledge of the two when stock trading.
We have a brilliant team of financial experts who go above and beyond to help our customers develop their trading methods here at CAPEX. Their strategies include equipping traders and investors with the appropriate skill set of technical analysis using various indicators and charts to promote overall successful trading. In addition, we have our very own specialised online trading academy that is designed to give every customer the opportunity to freshen up on their skills. It includes helpful introductory videos for those that are just beginning to trade. It also has more advanced features that can adapt to your level of learning.
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We at CAPEX have had years of experience as a high-quality online broker. We’ve developed our learning and trading methods to suit the growing demand for trading in the various financial markets. We pride ourselves on delivering the best market analysis training to help individuals master the skills needed to be successful traders.
We focus on both fundamental and technical analysis of each asset you’re choosing to trade. The technical side includes specific charts and indicator tools to help you predict future stock price changes. We also keep our customers up to date with the fundamentals like the current financial lingo and news of what companies could be releasing that could also impact the stock market prices.
We should start by answering the question “what are bid and ask prices?” Bid and ask, or bid vs ask, indicates two prices. The bid price shows the maximum price a buyer is willing to pay for a share of stock. An asking price is a minimum price a seller is willing to accept for that same share of stock. A transaction happens when a buyer is ready to pay for the stock at the best offer they can get. On the other hand, the seller sells the stock at the highest bid price.
Both bid and ask prices are determined by the stock market. They’re set by the individuals and institutions who invest in that stock and therefore control buying and selling decisions. For example, if the demand for a share of the security outweighs the supply, the bid and ask prices will both have an upward increase. Similarly, if the supply outweighs the demand, the prices will decrease as they follow the trend of the investors and stock traders. The overall spread between the bid and ask prices is determined by the number of people trading the stock. The more individuals trading, the smaller the spread. Because of this spread, we don’t charge commission fees at CAPEX but rather make our returns through the various spreads.
The spread is heavily influenced by the market, like the bid and ask prices. Brokers and market makers are ready to buy or sell shares at any given time. Buying at the bid price and selling at the asking price creates the bid and ask spread in between. The spread is there to compensate brokers in case of the risk of volatile stocks moving in the market. The more volatile the market means, the more expansive the spread will be. As mentioned, the number of individuals trading also influences the spread.
Here at CAPEX, we have an advanced online platform that accommodates a large volume of traders at a time. We help to prevent any lags or glitches during peak hours. We know that the more traders there are, the more liquidity increases, and the bid and ask spread will inevitably shrink. On the other end, less volume of traders means there is low liquidity and an increase in the spread.
When the individual is ready, they can order with their broker to make a stock trade. It can vary from a buy order or a sell order, depending on what the customer wants and sees will benefit them in the market.
If you want to buy and bid, the customer will see an offer submitted by the broker into the stock exchange. The request to purchase will include the number of shares in that order and the given price the shares are going for. The highest proposed price shows the demand for the given stock in the market.
If you want to sell, the broker will show several shares for that specific stock and the proposed asking price for it. The lowest proposed price represents the supply for the given stock in the market.
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When thinking about the differences, we need to look into the bid and ask in more detail. We briefly mentioned liquidity, which is how easily the security or asset can be converted into fiat cash without affecting its market price. In general, the tighter the spread, the higher the liquidity and vice versa.
The bid refers to the highest price a trader is willing to pay for a share of the stock, and the ask is the lowest price an owner of stock is ready to sell it for. For example, if a stock is trading at £10, the individual who wants to buy that stock will need to bid at least £10 or higher to purchase. Likewise, if a stock is on sale for £10, the individual selling this needs to consider how low they want to sell it for, depending on the supply and demand in the market.
At CAPEX, we offer accounts that can facilitate higher funds and assets. If individuals do have a large amount of stock they want to trade, they need to consider when is the right time to enter their position and exit their position in the market. It can be done with the help of a narrow bid and ask spread. The spread already has different outcomes depending on how wide or small it is. But, we know that the wider it is, the riskier for the traders because it is so volatile.
A narrower spread ensures it will be easier to know when to open and close your position because the liquidity is increased and the volatility is reduced. You can act fast and have the potential to capitalize from the bid and ask prices being so close. Whereas a wider bid and ask spread is more likely to be time-consuming because you’re waiting for that right moment to enter and exit and could lose money as a result.
Our online platform is jam-packed with daily financial news. We do our best to give our customers the most recent news developments. We know that companies may release new products or make announcements on social media and other platforms. It can be hard to keep up with everything that’s going on, so that’s why we do the work to keep our customers updated with the latest news during and after trading hours.
If you choose to trade stock on CAPEX, you could be at an advantage to the bid and ask spread. We want all our customers to benefit from our trading resources and tools to increase their skills and understanding while trading with us. We monitor the financial news regularly, so we are kept up to date. These include company earnings and even surprise announcements that could occur after trading hours. The more you know about the stock market and specific stocks, will help you to trade at the correct entry and exit points and benefit from these by making a profit.
The bid and ask spread also benefits market makers. These are brokers, companies or individuals that quote both the buy and sell price of a tradable stock in the hopes to make a profit on the bid and ask spread. They benefit from higher trading volumes due to the smaller spread and less risk. But they also benefit from traders who are willing to trade in less liquid sessions.
The market maker still has an opportunity to make money if their prices are matched. The bid and ask spread acts as a negotiation for traders and market makers. Suppose you are a trader who is willing to walk away from the given bid and ask prices. You may find something you’re looking for through limit orders, and the rewards could be lucrative. In addition, if you proceed with a buy or sell trade, the market maker is making money.
If you are familiar with day trading, you would wonder; what are bid and ask prices for the stock you are monitoring during the day. At CAPEX, we encourage our customers to find day trading strategies that work for them. If you have the time during the tradable hours of the day, then day trading stocks with bid and ask prices could be right for you.
You want to get the best price possible. If we think about the bid price, it is better to buy at the lower bid instead of paying a higher asking price. If you buy at the asking price and sell at the bid price, you will be ‘paying the spread’. This strategy may not be the best if you continue to use it because the amount you’re spending could significantly increase if you do this in every trade. We recommend you find the best price possible instead of feeling rushed or pressured to settle for what is being asked.
However, you may require this strategy if the market is moving quickly and you need to get in or out of a position soon. Some stockbrokers require you to pay the spread when you decide to enter or exit a position and want to trade. It could work against you if this fee is always paid, but it could work in your favour if you choose the entry points carefully and end up making a profit. Day trading strategies are time-consuming, so they require a lot of practice and understanding. We offer a stocks broker demo account for our customers at CAPEX to help you master technical analysis and methods to help you on your stock trading journey.
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There are a few risks that you should consider when trading with the bid and ask spread. We’ve highlighted some of the critical risks below to consider if you want to trade the bid and ask spread with us at CAPEX.
Although there are moments where there is a narrow spread between the bid and ask prices, it can be hazardous, and the spread could widen at any moment. The traders and investors should consider how confident they feel that the stock’s price they’re watching will reach a point to overcome an obstacle of the spread and be able to make a profit. If they believe that the price is reliable, they should go ahead with the trade. Otherwise, consider waiting for a tighter spread.
The higher the volatility, the more likely the market maker will hold a position that moves against them. Because of this hold and the added risk, the spread will widen. Some stocks are already extremely volatile, but if you factor in outside news announcements, trading after-hours, or pre-market, it will also increase the risk.
Similar to the volatility, the trading volume can affect the bid and ask prices. If you’re choosing to trade at a popular time, there will be more prices available to buy and sell from. You’re most likely going to make a successful transaction in that time as the risk is reduced. However, if you cannot trade at peak trading hours and there is a lower volume, you may not find the correct bid and ask prices that work for you. Many brokers don’t operate outside of the regular trading hours, so fewer people are likely to trade in that time, meaning there is a higher chance of wider spreads and an increased risk of money loss.
Here at CAPEX, we wanted the bid and ask explained so that you can have a greater understanding of the term. We want our customers to think about the differences between the two. Where the bid price relates to what price the trader is willing to spend on stock. And the ask price, which relates to how much the seller is asking for that stock. We encourage you to join CAPEX today and hope you consider trading with the bid and ask spread and use our online tips and tools if you are a beginner or an experienced trader to develop your online trading strategies in the long run.