Expert: Steve Hach - 5/3/2011

Question
Apparently Paul thought my short question was too long to answer. Maybe you can be of assistance.

Sorry, the question sounds stupid. What I really want to know, is, despite the trading price, are you always paying the ask price when you're buying a stock.

For instance, if I bought this

(http://finance.yahoo.com/q?s=PEIX&ql=1)

stock right now (it may change by the time you see it), even
though it is trading at 47 cents, would it cost me 95 cents to
buy it, because of the ask price?

Why is this? Is it because the ask price (due to speculation) is always adjusted to the company's "1 year target est."?

I'm not sure (because the bid isn't listed), but if I bought this right now (@ $0.95 I assume), I wouldn't even make an capital gains unless it went up further than the current ask price?

Answer
Mike,

the bid price is the price you can SELL the stock at if you own it.

It is the price people are offering to buy the stock FROM YOU.

the ask price is the price you can BUY the stock at if you do not own it.

It is the price people are offering to sell their shares TO YOU.

The difference in the bid/ask prices is referred to as "the spread."

The spread represents the profit or cut that the broker/dealer/market maker is going to make for facilitating the trade.

Here it is for PEIX

Bid:   0.4120 x 300
Ask:   0.54 x 600

So, it's a spread of @13 cents, that's a HUGE spread for a stock only trading at 47 cents--in percentage terms it's almost 25%

Typically, the spread is far narrower for most tickers.

The reason the spread is so big here--I suspect--is because this is a very illiquid stock that doesn't have much volume.

You tend to get more shenanigans going on with such stocks.

If you checked almost any other major ticker that actually trades in a more liquid manner, Apple for instance:  http://finance.yahoo.com/q?s=aapl&ql=1

you see that the spread is much narrower.

Bid:   345.52 x 100
Ask:   345.89 x 100

that's a spread of 37 cents but the stock costs @345$, so it is a miniscule spread in percentage terms--1% of 345 is $3.45.  10% of $3.45 is 34.5 cents.  so the spread is 1/10 of 1% of the actual cost of the stock.

There are so many apple shares, and so many people trade it, that the spread has been reduced to almost nothing.  If millions of shares trade a day then a million times 37 cents is big cut for traders but with a stock that only trades a few hundred shares a day the spread is higher so that there is profit in making the trade despite the low volume.

The one year target estimate has nothing to do with the actual bid/ask right now, that's just a number based on what analysts think the stock may be trading at in 12 months time.

so forget the 97 cents except to use as a metric to figure out if the stock is supposed to go up or down according to analysts.

a stock with a price target that is double the current price would be a better choice than one whose 1 year price target was half the current price.

I would google this if it doesn't make sense.

Best,

Steve