Once you’re in a position to invest, you’ll quickly realize that the world of investing has plenty of opportunities. Throughout it all, it’s important to take in information to make informed decisions about what your next moves will be. Learn more about the world of options trading and bids and asks.
What Are Stock Options?
A stock option is simply your ability and right to purchase or sell a security or other asset at an agreed-upon price on or before a set expiration date. There are two types of options:
- Call: when you bet that a stock price will rise
- Put: when you bet that a stock price will fall
Bid, ask, and the bid-ask spread are other important things to know when investing and building your portfolio.
- Bid: A bid is the most a buyer wants to pay for stocks and other investments.
- Ask: An ask is a seller’s minimum selling price.
- Bid-Ask Spread: The difference between the bid and ask. For example, if an ask if $10 and a bid is $9, the spread is $1.
Why It’s Important to Consider the Bid-Ask Spread
Bids and asks can fluctuate continuously throughout the trading day. Because of this, the spread can vary widely and cause a security to become very liquid, which speaks to a stock’s supply and demand. You’ll want to watch out for a high bid-ask spread because that means there aren’t many trades taking place and, therefore, it’ll be more difficult for sellers to come close to matching buyers in price. In addition, you may notice large changes in share values that could be hard to keep up with.
Bid-Ask Spread Tips
Even if you use a broker, it’s still a good idea to be aware of the inner workings of the stock market so you can understand what your broker is doing and be able to communicate your preferences to them. These bid-ask spread tips can help do the following:
- Calculate spread percentages. Bid-ask spreads can be significant, so calculate the percentage to understand the fluctuation more. As an example, a $1 spread on a $15 stock is a higher percentage than the same $1 spread on a $45 stock.
- Use orders. The three most common orders are limit, market, and stop. Orders will help you manage your purchase or sale. Utilize a limit order when you know what you want the price of the security to be and want to instill a limit to your transaction. Choosing a market order is your priority in finalizing a sale or purchase immediately, but know that you may pay higher prices. Consider a stop order when you have an absolute price in mind and want to start a transaction when the stock gets to that amount to minimize your losses.
- Check real-time pricing. Pricing is made public, so before you assume, check in to get a real figure. A stock’s value can change rapidly, and you don’t want to be left behind.
There is so much more to learn, and this is just the beginning. However, with the right frame of mind and information at your disposal, you’ll be able to make valuable and successful trades.