Understanding and Earning from Bid Spread

Traders and investors will always have to deal with bid spread. In gist, a bid spread is the difference between the buying price and the selling price. For example, a company share is currently at a bidding price of $5.00 while the selling price is at $5.50. In this case, the bid spread of the company is at $0.50.

Demand and Supply

The biggest determining factor of the bid spread is the demand and supply of a certain product the company distributes or manufactures. If the supply exceeds the demand, then the price of a certain product goes down and the price also goes up when the demand exceeds the supply.

The price per share of the company is greatly determined by the demand and supply of their product. Their price per share will easily go up if the product the company sells is in short supply. Companies are not allowed in selling short supply as this is could be market manipulation. They could however, sell the products in high quality so that the demand will be even higher.

The movement of demand and supply greatly affects the bid spread of the company shares. Any company movement could place a dent on the bid spread but it is only through demand and supply that the effect could become considerable.

A company’s success is determined by the need of their product. If no one wants their product or wants to avail of their services, then the price per share will greatly go down.

Working with Bid Spread

The bid spread of a company is not big – usually coming in cents. But the bid spread could change through time that the bid price of a share two years ago is considerably different from the selling price.

For example, you bought 100 shares for a relatively successful company only at $5.00 per share. Two years later, the company is a huge success that the selling price is already at $30.00. The difference in selling and buying should give you enough earnings since in less than two years; the price per share has increased six-fold.

Starting on Bid Spread

Before you go out and start investing, understand the bid spread will always be volatile. If you consider the bid spread in one day only, you will find out that the selling price will always be higher than the bidding price. But that will change overtime depending on the company’s performance.

Again the rule of demand and supply will help you determine if you are investing in the right company. There are market makers and brokers who will persuade you that the company has a great potential. But you should know better.

Always take time to research on where you should invest. On the other hand, never disregard the tips you get from market makers. Their ideas are often good and all you need to do in your end is to research.

It could be a commodity based or services based company but the main factor that you should consider in trying to figure out if the company will perform is the demand for that services. If you can figure out if that type of product or service will be in demand in the near future then the investment is worth it.

The bid spread you should not be limited for today. Bid spread could be your basis on how to improve in your portfolio. Always be smart on the companies where you need to invest. The bid spread will only work in your advantage if you are aware of the demand and supply that determines the bid spread.