Buying a security can be like purchasing a car. You do your research, shop around, and decide on a vehicle you feel best suited to get you from point A to point B. In the same way investments can help get you from where you are now to a desired destination such as a vacation, retirement, or financial freedom.
Bid/Ask
With securities there are bid and ask prices. The bid is a price someone is willing to buy, and the ask is a price someone is willing to sell. The difference between these two prices is called the spread. A large spread will generally mean that the security is less liquid than one with a smaller spread. So, think of the demand for a vehicle such as a Ford Pinto verse a Toyota Camry. Many Toyota Camrys are sold new and used every year so it’s easy to determine the worth of the vehicle on the open market, while conversely a Ford Pinto is no longer in production and not many are available used so there is not likely to be consistent pricing. The Camry would have a smaller spread which is important for price stability and possibly lower costs.
So, when placing a buy order for the security you want to be aware of the spread. For example, if you are going to buy XYZ stock at Schwab you will see a Bid of $100.36 (4) AMEX and an Ask of $100.38 (6) CBOE. This shows a spread of $0.02 cents with 4 buyers and 6 sellers with the best prices being on two different exchanges. We are generally looking for a narrow spread for price certainty if/when we need to liquidate an investment.
Market/Limit Orders
If an investor wants to make sure they get a certain quantity of shares they would place a market order, while they would have no control over the price it would ensure execution of the buy/sell. This would be equivalent to walking into a dealership and paying the sticker price of a vehicle with no questions asked because you are keen to secure it the same day. If the investor was more worried about getting the stock at a particular price, then they would place a buy limit order. Market orders are more ideal for securities with tighter spreads whereas limit orders are useful when trying to buy/sell a thinly traded security. Using limit orders to purchase stocks and ETFs is more advantageous.
Custodian
Once you have your price range and budget you start looking for a dealership that can accommodate your parameters, which can vary greatly with the different sellers. Similarly, when trading securities each custodian will show you the pricing and charge differently for trades. Picking the right place to purchase a vehicle, car or investment, can make a big difference in additional costs and possible hidden fees.
Conclusion
Fruition Financial strives to reduce expenses when buying and/or selling investments. We are cognizant of bid/ask prices as well as placing limit orders when appropriate. These small details add up over the life of a portfolio and should be considered. We are committed to partnering with companies that provide value and increase the overall client experience.