The stockstock exchanges determine the value of the stock prices. Here, the bid and ask prices meet while the exchange functions as their intermediary. Hereinafter, we shall try to give and explanation of the bid and ask prices.
The bid price stands for the price at which the buyer agrees to purchase certain a certain amount of stock. Therefore, the bid price is stipulated by the buyer.
On the other hand, the ask price represents the price at which the seller will go ahead with the sale of the same stock. The ask price is, therefore, determined by the seller.
The exchange functions mainly to coordinate these prices with regard to both, the buyers and sellers of stock. Naturally, this service cannot be free of charge.
There is a difference between the bid and the ask prices. In reality, the price, determined by the sellers, always exceeds the bid price. The investors will need to pay the stipulated ask price if they have decided to invest in stock at a given higher price. Yet, if persons intend to sell their stock, they will get the bid price. The latter will represent a lower sum than the ask price.
The spread refers to difference between the ask price and the bid prices. The spread is directly transferred to the hands of the brokers or experts who manage these stock transactions. On the other hand, the spread also serves for the payment of other relevant fees, not just for the commissions paid to the brokers.
If individuals do not make use of specific market orders, the setting of prices for both, the buyers and sellers, becomes impossible. This is highly relevant with regard to stocks that are actively traded. Their character is typically quite dynamic.
The bid and the ask spread consume a part of the profit. However, it is not advised to avoid them as they have been established as an effective system over time.
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