How Does the Supply and Demand System Work?
The stock market operates like an auction where investors – whether individuals, companies, or governments – buy and sell securities. It is important to understand the various options you have for buying and selling, which involves understanding the prices of supply and demand. Unlike most things consumers buy, stock prices are determined by both the buyer and the seller.
How Does the Supply and Demand System Work?
The buyer determines the amount they are willing to pay for the stock, which represents the bid price. The seller sets their price, or ask price. The role of exchanges and the entire broker-specialist system is to facilitate the coordination of bid and ask prices. This service comes at its own cost, which affects the stock price.
Pricing of Supply and Demand
You can see the bid and ask prices for a stock if you have access to the appropriate online pricing systems. You will notice that they are never symmetrical. The ask price is always slightly higher than the bid price. You will pay the ask price if you are buying the stock, and you will receive the bid price if you are selling the stock. The difference between the bid price and the ask price is called the “spread.” It is kept as profit by the broker or specialist dealing in the transaction.
Market Orders
If you want to execute your order almost immediately, you can choose to place a market order, which goes to the top of the list of pending trades. The downside is that you will receive either the lowest or highest available price in the market.
Conclusion
There are ways to overcome the bid-ask spread, but most investors prefer to stick with this established system that works well, even if it slightly affects their profits. If you are considering expanding, try a paper trading account before using real money. Advanced strategies are for experienced investors, and beginners may find themselves in a worse position than when they started. This is not to say that you won’t reach the stage of using them and perhaps excel with them, but it is best to stick with the basic rules when you start and only begin your experimentation.
Frequently Asked Questions (FAQs)
What are bid and ask sizes?
Bid and ask sizes tell you the number of shares that are ready to be traded at the given price. The number represents the full sizes of shares. These shares are usually 100, so a bid size of 25 means there are 2500 shares ready to trade at the ask price, but check with your broker to verify the lot size they use.
What does a large bid-ask spread mean?
The wider the bid-ask spread, the more volatile and less liquid the security is. Trades may not execute frequently when there is a large spread, and when they do, the price is likely to fluctuate quickly compared to more stable stocks that move by a few cents at a time. This makes it difficult to predict the price you will get with a market order, and stop orders are less likely to get the exact stop price you set.
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Source: https://www.thebalancemoney.com/understanding-bid-and-ask-prices-3141317
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