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The Bid/Ask Spread and How it Effects Trading

By: David Kosmider

The Bid/Ask Spread is important factor in trading, whether it is stock trading, options trading or pretty much any other asset. The Bid Price is the current highest price at which someone in the market is willing to buy a stock. The Ask Price is the current lowest price that someone is willing to sell a stock. The difference in these two amounts is called the Bid/Ask Spread.

The Bid/Ask Spread is determined mainly by liquidity. If a stock is highly liquid, meaning there is a large volume of shares being bought and sold, the Bid/Ask Spread will be much lower. A low Bid/Ask Spread is important to traders because the extra cost that you pay in the spread will eat away at the profits of your trades.

For example, on the stock CAH, if the Bid Price is $69.33 and the Ask Price is $70.33 the Bid/Ask Spread would be $1.00. If you were to buy 100 shares and then immediately sell them using market orders (assuming everything stays the same and not factoring in commissions) your loss would be $100 just because of the spread. Higher volume stocks such as MSFT can have spreads as low as a couple cents.

David J. Kosmider is the President and cofounder of TimingResearch.com which provides advice and recommendations to stock and options traders worldwide. View all of his articles and services here: http://www.timingresearch.com/

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