Stock exchange share prices tell us the value of a share at any point in time. When the stock exchange is open, these prices are in constant flux as a result of changing demand and supply pressures from market participants.
The different Stock Exchange Share Prices.
Typically, the stock exchange quotes three prices for any stock: the bid price, the mid price, and the offer price. These prices reflect the prices at which market participants are prepared to either buy or sell a share.
The bid is the highest price that a market participant is prepared to pay for a share. The offer price on the other hand is the lowest price at which a market participant is prepared to sell a share at. The offer price is also known as the ask price. This means that in normal situations the ask price should be higher than the offer price.
When you subtract the offer price from the bid price, the difference is called the bid-ask spread. The average price of the bid price and ask price is the mid price.
On rare and abnormal situations, you can have inverted stock exchange share prices. This happens when the quoted bid price is lower than the quoted offer price. This phenomenon is known as backwardation. Incidentally, backwardation has a completely different meaning in the futures market, so don't confuse the two.
What do Stock Exchange Share Prices mean to an Investor?
When you are buying a share, your broker will normally quote you the bid and ask prices. However, when you see a price quoted on a ticker or on a web site, it is more likely to be the mid price.
It is important to know what prices you are dealing with, because the Stock Exchange Share Prices determine what price you will have to pay for a stock when you want to buy it, or what price you will receive for it if you want to sell it. The bid price is the price you will have to pay to buy the stock, while the offer price is the price you receive when you sell it.
This means that as soon as you buy a stock, and decide to sell it a second later, if the share price has not changed, you will have to sell at a loss. Your loss will be equal to the bid-ask spread. The bid-ask spread is also known as slippage, and is the market makers commission for buying and selling a share.
Less liquid shares tend to have higher spreads (as a percentage of the share price) than more liquid shares. Penny shares are also notorious for having wider than average spreads.
Example of Stock Exchange Prices
Let us consider the hypothetical case of Stock XYZ which is quoted at $32.54 - $32.58.
The bid price is $32.58, while the offer price is $32.54. The mid price is the average of the two, which is $32.56, and the bid-ask spread is $0.04 (4 cents). The spread is a reasonable 0.13% of the share price. Expect wider spreads for less liquid stocks, as well as penny shares.
This means that if you were an investor who wanted to buy Stock XYZ, you would have to pay $32.58 for each share of the stock. If on the other hand, you already owned shares in Stock XYZ and wanted to sell them, you would only receive $32.54.
Understanding stock exchange share prices is one of the very first things a new investor needs to get to grips with. It is an essential prerequisite for successful investing, and fortunately not a difficult one.
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