What are the risks?
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.
Variable spread
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.
High volatility
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.
Trading volume
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.
Conclusion – Trade CFDs at CAPEX
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.