Stock spread: wide vs. narrow?
At First Time Investor - Stock market spreads, the author states:
For smaller companies the spread can
be as wide as 15-20pc. That means the
shares would have to go up as much
20pc before you start making a profit.
Why is that? If I am a buyer and I buy at 1 $ and sell at 1.02, I make a profit irrespective of the spread. No?
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The point is that the bid and ask prices dictate what you can buy and sell at (at market, at least), and the difference between the two, or spread, contributes implicitly to your gains or losses. For example, say your stock actually had a bid of [CO].90 and an ask of .10; i.e. say that was the last price. You would have to buy the stock at the ask price of .10, but now you can only sell that stock at the bid price of [CO].90. Thus, you would need to make at least that [CO].20 spread before you can make a profit.
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