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Finance: What is Spread? 48 Views
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Description:
What is spread (bid-ask)? The bid-ask spread compares how much a buyer will pay to how much the seller will sell for. The asking price is what the seller wants, while the bid is how much the buyer offers; the spread looks at how much higher the ask is than the bid.
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Transcript
- 00:00
finance a la shmoop. what is spread? before we start just no. get your mind
- 00:08
out of the gutter. spread refers to the money value between [100 dollar bill]
- 00:11
a bid and ask price under a market maker structure of trading securities. no more
- 00:21
wire hangers, a plastic hanger company is publicly traded on an exchange like
- 00:27
Nasdaq where buyers bid for a price to purchase and sellers ask for a price to [Nasdaq wall shown]
Full Transcript
- 00:34
trade. no more wire hangers is bid this moment at 37:23 a share by buyers
- 00:39
willing to buy right now at that price and is being asked at this moment at a
- 00:45
price of 37.31. note the eight cents a shared difference in the share prices.
- 00:50
that dif is the spread between the two prices, and it's worth noting that in [bread is buttered]
- 00:55
extremely volatile stocks, the spread widens. and in boring highly liquid
- 01:01
stocks which don't move much, the spread tightens or is narrower. that is on a
- 01:07
volatile equivalent of no more wire hangers the spread might grow to 20 or
- 01:11
30 cents a share whereas a boring name that pays a big dividend and the stock
- 01:16
never moves much we're thinking AT&T here, [man snores at a desk]
- 01:19
well that spread might be just three or four cents. so why grow? well because a
- 01:23
market maker in a volatile stock doesn't want to be caught losing money on her
- 01:28
inventory. if no more wire hangers suddenly gapped down to 37.10 a share [equation shown]
- 01:33
well it would be likely less than the average of what the market maker paid
- 01:38
for her quote "inventory" unquote in that stock from which he was making a market
- 01:42
in it. each time the shares trade the market makers dip into that spread to [woman dips cracker in butter]
- 01:47
pay their bills and allow them to keep doing business. so that's spread. and it's
- 01:51
not the type that Prince used to sing about. [man on stage]
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