Normally when you look at your charts you only see one price and that price is the bid price. Some types of charting software are capable of displaying the offer price but most commonly the price you see is the bid price.
This can confuse new traders as once they are all set up to go with there dealing station and place their first trade they wonder to themselves why did I get filled at a different price from what I saw on my computer screen.
This could be because the market moved between the time it took you to look at the chart and actually place the order or it could be that the new traders was unaware of the difference between the bid and offer.
The bid is the price other traders or institutions are prepared to buy a security at and the offer is the price other traders and institutions are prepared to sell a security at.
Now, if you want to buy a security you will have to pay the price at which traders are prepared to sell to you at. So when you buy something you pay the offer price.
On the other hand if you want to sell something then you pay the bid price. That is the price at which traders are prepared to buy from you.
The difference between the bid and offer is called the spread. Depending on what security and how much activity there is in that market will determine the spread. In some markets the spread can be quite large and in other markets the spread can be small.
To simplify this think of it like this. When you want to go long (buy) the market you will pay the offer price and therefore the spread. When you close your position (sell your previous position) you get the bid price and don't pay the spread.
So at least once during the trade you will pay the spread. If you first enter the market long you will pay the spread on the way in but not on the way out.
If you first enter the market short you will not pay the spread initially but you will pay it on the way out.
There are other combinations of this but this is the most common. Depending on which financial newspaper you buy you will either see the bid/offer price quoted separately or if there is just one price that is normally the mid price between the bid/offer spread.
Most brokers are reputable nowadays but when asking for a quote never tell them what you intend to do just simply ask for a price on Xyz company or security. That way the broker doesn't know what you want to do.
If you tell him I want to buy Xyz Company first he knows your intention and has some advantage. If he doesn't know if you want to buy or sell he will give the best prices he can find. Imagine the situation you have a position in Xyx Company and call your broker and tell him that you are trying to close your position so you need a quote.
With that knowledge he theoretically has an advantage because he knows you are trying to get out of a position and may accept an unrealistic price just to cut your losses.
If on the other hand you are simply asking for a price the broker doesn't know if you are trying to add to the position or close it. Even with electronic dealing station you should be able to see the bid/offer prices before the system knows your intention. In other words you should not have to select an option to buy and then get the bid/offer price first.
Author Resource:-
Martin Chandra is a full-time investor. He has been researching investment strategies and make his own living. For more information please go to here.
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