On a real exchange every stock has two prices at once: one to buy and one to sell. The gap between them is a fee you pay on every trade, and nobody sends you the bill.
Learning objectives. After this week you can (1) explain the bid, the ask and the spread; (2) explain how market and limit orders work in the arena; and (3) compute what spreads and slippage would cost you outside it.
Remember this: a market order is sure to fill but not of its price. A limit order is sure of its price but not to fill.
1) Bid, ask and spread
The bid is the highest price buyers will pay right now; the ask is the lowest price sellers will accept. The gap is the bid-ask spread. Market makers, firms that stand ready to buy and sell all day, earn it as their fee. Big, heavily traded stocks have spreads of pennies; small or turbulent ones can be far wider.
2) Orders in the arena
A market order fills right away at the live quote, but only during U.S. market hours, roughly 9:30 AM to 4:00 PM Eastern, Monday through Friday. When the market is closed the arena rejects it rather than fill you at a stale price, and suggests a limit order instead. A limit order names your price and waits; the platform keeps checking it against the live price:
Buy limit fills when price ≤ your limit · Sell limit fills when price ≥ your limit
When it triggers, it fills at the market price at that moment, which can be better than your limit: a buy limit at $95 that triggers on a quote of $94.70 fills at $94.70. Your cash is checked again at fill time, and you can cancel an open order before it fills. A sell limit triggers on the way up, so it is a take-profit, not a stop-loss; set one below today's price and it simply sells now.
| Order | Certain of… | Uncertain of… |
|---|---|---|
| Market | Execution: you will be filled | Price: you take the quote |
| Limit | Price: never worse than your limit | Execution: the price may never come |
3) What trading costs outside the arena
Round-Trip Spread Cost = Spread × Shares
Bid $49.97, ask $50.03: a $0.06 spread. Buy 500 shares at the ask and sell at the bid, and the spread cost you $0.06 × 500 = $30. Slippage is the gap between the price you saw and the price you got: see $80.00, get filled at $80.12 on 500 shares, and it cost $0.12 × 500 = $60. The arena charges no commission and no spread, so the same habits cost more in a real account.
Quick self-check
(a) Spread $0.10, 300 shares, round trip. Cost? (b) Your sell limit is $60 and the stock is at $58. Does it fill? (Answers: $0.10 × 300 = $30; no, a sell limit waits for $60 or higher.)
Common mistakes
- Market orders in thinly traded names. The wider the spread, the more speed costs.
- Treating a sell limit as a stop-loss. Below the market it just sells now.
- Ignoring missed fills. A limit that never filled can cost you the whole move.
This week in the arena
Place one limit order and write down its limit price when you place it: Recent trades shows the fill price but not the limit you set. If it fills, compare the two; if it has not filled by the deadline, say so, because a limit that never fills is a result too. Then look up the real bid and ask of the stock you have traded most on any free quote page, and compute what a round trip of your shares in it would cost in spread alone.