Joseph Stone Capital Insights: Understanding Bid-Ask Spreads and Liquidity

Every traded security has a bid (the highest price a buyer will pay) and an ask (the lowest price a seller will accept). The difference is the spread. Spreads tend to be narrower in heavily traded securities and wider in thinly traded ones. Liquidity describes how readily a position can be sold without moving its price. Investors should understand that illiquid securities can be hard to sell at a desired price, or at all, and that wide spreads raise the effective cost of trading. Market orders execute at prevailing prices; limit orders set a maximum or minimum price but may not execute.

Disclosure: Educational content only; not an offer, recommendation or solicitation to buy or sell any security. Investing involves risk, including loss of principal. Joseph Stone Capital, LLC, member FINRA/SIPC, 585 Stewart Avenue, Suite L60C, Garden City, NY 11530.