All right.
In this section, we're going to talk about the spread and bid and ask prices and kind of a little bit
more of the nuts and bolts of trading here.
And when you think of like a stock quote and we talk a lot about stock quotes with a stock quote is
is it's the price of the last trade between a buyer and seller.
The last agreed to price where the buyer and the seller come together and they say, yes, this is the
price.
And so the stock quote is the last trade and it's constantly changing.
You'll see it just constantly updating.
First the stock quote.
So those are real trades that happen now in between and when we're actually placing orders to buy and
sell stocks, we have a bid and ask price.
Right.
And so the term bid refers to the highest price a buyer is willing to pay for a specified number of
shares of a stock at any given time.
So the bid is the highest price of buyers willing to pay.
So you can see in the example above B 2212, the ask refers to the lowest price at which a seller is
willing to sell at 22.33, for example.
And the bid makes sense, right?
The bid price will almost always be lower than the ask or offer price.
And the difference between the bid price and the price price is called the spread.
And you can see the difference is 0.21.
And when we actually make the trade, you can see where we're going to click on that green button,
but more on that in a second.
So the spread is the transaction cost, right?
So why do they have a spread?
Well, there has to be somebody managing all this stuff and there's a transaction cost there.
So when a trade is made, you try it.
Traders buy at the ask price and sell at the bid price, right?
So that's what they're doing in an actuality.
But but there's a market maker and the market maker buys at the bid price and sells at the ask price.
And if we need to pause for a second, just pause the video here and kind of look at that and read that
again on the screen if you need to, because it gets a little confusing.
But market makers are basically the folks behind the scenes that make it work.
There's some that are just dedicated.
Market makers are usually brokerage houses and they provide liquidity in the market.
They kind of allow everything to kind of run right, And they're compensated for taking on risk of holding
until a buyer and seller match up there, the act as the middle man or middle person.
So until it's all kind of processed, somebody's got to hold these these agreements, these prices.
And that's where bid and the sell and the bid and the sell and the buy and the asset price there, those
are all of those ads.
So the more liquid something is, which means the higher trading volumes, the lower the cost transaction
costs or the spread.
Right.
If you've got a big company like Apple that trades frequently, there's less risk as far as finding
buyers and sellers than something that might be a real small company or a penny stock that buys more
infrequently.
So if we look at that, you can see that stock A and stock B here and you can see that the prices don't
matter as far as this transaction cost, that's just what the stock is going for in terms of buy and
selling prices.
But you can see that spread is different, right?
So if you were to look at this and say, well, which which one has a lower transaction cost, what
would be the one with the lower spread.
Right.
It would be the one stock B at 0.02 versus stock 0.21.
And really what's happening is doesn't matter because the price is higher.
What's going on here is that stock B is at is just has a lot more volume, a lot more transactions,
thus a lot less risk for the market makers and thus they can pass on a lower transaction cost to us.
So in reality, when you're actually buying stuff, when you go on to your broker site and you want
to buy some stock, you're going to click that green button, whatever it's saying and say it's one
6288, you're going to go on and you're going to buy that.
And if I'm on the other end of that transaction, I want to sell I'm going to sell it at 160 to 86 on
stock B and you can see that 0.02 is just going to kind of go into thin air.
That's what it's going to go to, to the transaction, to the market makers to help that transaction
occur.
So if you're wondering what the spread is, when you're like, Wait a minute, I just bought something,
I already lost money because that spread.
Well, that's what's going on here and that's just part of the cost of doing business.
Even if, let's say you have a broker that's offering free trades, there's that spread cost in there
as well too.
So that's something to be aware of.
And again, wrapping up the more liquid or the more higher volume, the less risk for the market maker,
the lower the spread.
And you'll see that when you make a transaction, you'll know the spread, right There might be before
you click the button to buy.
So you can kind of get a feel for the spread.