I recently have been looking at the Bid-Ask Spread (sometimes called the Bid-Offer Spread) to help me determine the right time to add to my positions. Here are some tips I’ve picked up that you might find useful when looking at your stock’s spread.
1. Understand the Numbers
There are four pieces of information that make up the spread info. Find them, know them, love them:
- The Bid Price. This is the amount you will pay to buy the stock right now.
- The Ask or Offer Price. This is the amount you will receive to sell the stock right now.
- Bid x Ask Shares. This is the number of shares requested for purchase versus the number of shares available for sale.
- Volume. The number of shares traded from the beginning of the session to the time of the quote.
2. Check the number of bidding and asking shares.
If you see something like 5.0 x 3.0 for the bid x ask shares, there could be a potential rally as the number of shares requested for sale is exceeding the number of shares available to purchase. This constrained supply may increase the share price.
Conversely, if the bid x ask shares are showing up as 2.0 x 4.0, there are more shares available to purchase than there are to buyers. This surplus in supply could lead to falling prices.
3. On the NYSE, Check it Real-time.
The NYSE bans the publication of bid-ask spreads on delayed quoting services, so if you want to see what the spread is, log in to your brokerage account and get a real-time quote.
Wrapping it Up
The bid-ask spread is important for those who are looking to maximizing their returns by timing their entries, and also can provide useful indicators when a stock is about to turn around. I encourage you to read over the excellent articles below to better understand how the spread works.
Resources
Trading – Bid, Offer and Spread. by Chris Lott. The Investor FAQ.
Why the Bid-Ask Spread is so Important. Investopedia.
What are the determinants of a stock’s bid-ask spread? Investopedia.