Bid-offer spread
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- See also: Scalping (trading)
The bid/offer spread (also known as bid/ask spread) is the difference between the buying (bid) and selling (offer) price of the same transaction (eg stock, futures contracts, options, currency).
The ask (offer) prices are immediate execution (market) prices for quick buyers (ask takers); bid prices for quick sellers (bid takers). If a trade is executed at market prices, closing that trade immediately without queuing would not get you back the amount paid because of the bid/ask difference.
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[edit] Case Study
[edit] Currency Spread
The exchange rate between the South African rand and the United States dollar might be 6.50 South African rand to the dollar. A person looking to convert rand into dollars might have to pay 6.55 rand for each dollar, while a person looking to convert dollars to rand might only receive 6.45 rand for each dollar he converts. It is usually written as 6.45/6.55 on paper.
[edit] Stock Spread
A person might place an order for 100 shares of Amalgamated Widgets. The broker might attempt to buy 100 shares at $12.50 each, and he would be more than happy to sell those shares at $12.60 apiece, bearing in mind that if he sets his sale price higher, the customer might find another broker with a lower price. As a result, spreads are often only what the market will bear.
On United States stock exchanges, the minimum spread for many shares was 12.5 cents (one-eighth of a dollar) until 2001, when the exchanges converted from fractional to decimal pricing, enabling spreads as small as one cent. The change was mandated by the U.S. Securities and Exchange Commission in order to provide a fairer market for the individual investor.
