The cost of a stock may fall in the 'spread' between what's asked and what's bid

BONDY ON MONEY

June 12, 1994|By SUSAN BONDY

Q: Why is a stock's "bid" price always lower than its "asked" price?

A: The "bid" price is the price someone is willing to pay for your shares. The "asked" price is the price at which someone will sell the stock to you.

The actual price at which you buy or sell might be somewhere between the bid price and the asked price. The difference between the bid price and the asked price is called the "spread" or the "markup."

On the New York and American Stock Exchanges, each stock is assigned to a "specialist," whose primary function is to maintain an orderly market in that stock -- that is, whenever possible, preventing the stock from swinging wildly on any one day. The specialist generally "makes book" by matching up buyers and sellers, who buy and sell simultaneously at the same price, often between the bid and asked prices.

But at times, the specialist might use his firm's capital to buy stock for its own inventory. When he sells stock from inventory, he will mark up the stock. This markup (or spread) is his "insurance policy" against occasional losses that can occur when the market drives the price below what he paid for the stock. Both buyer and seller will pay a commission.

Stocks listed on recognized exchanges are called listed stocks. But huge numbers of unlisted stocks are bought in the so-called over-the-counter markets, which include NASDAQ, National Market System, Pink Sheets and more.

The OTC market is a method of private negotiations among broker/dealers who talk to each other via communications networks.

In OTC markets, there are usually multiple market makers for each stock, each having different bid and asked prices. The bid and asked prices shown on the computer screens are a consensus of the highest bids and the lowest asked prices. As a result, the available bid and asked prices often come from different market makers.

When a brokerage firm is a market maker in a stock -- a fact which by law must be noted on the trading confirmation -- you will still be charged a commission to buy or sell. The firm makes its profit on the spread and on the commission.

Susan Bondy founded her namesake financial services company 1980 to provide financial planning and asset management. She is a frequent guest on "Good Morning America," the "Today Show" and National Public Radio. She is the author of "How to Make Money Using Other People's Money." Write to Susan in care of The Sun, 501 N. Calvert St., Baltimore, MD 21278. All letters will be treated confidentially.

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