If you’ve ever bought stocks, real estate, used cars, and for that matter, silver and gold, you have participated in the “bid-ask spread.” What is it? The ‘spread’ protects the seller. The ‘bid’ is what you sell it for if you wish to do so, and the ‘ask’ is the price at which you buy if you so choose.
Suppose, as an example, you bought a used car as an investment, hoping to sell it for more than you paid for it. You may have bought it at a real bargain at say $10,000, and when you went to sell it, the used car market had gone awry and you could only get $10,500 for it, and you were thinking when you bought it, of making a $2,000 profit. Do you sell it at a small profit, or wait and see if the market recovers? You may lose part of your investment if you sit on it. Your decision, but that’s the ‘bid-ask spread’. The market went down, leaving you with a car that you thought was a great investment, but it turned out not so much. You bought it at the ‘ask’ price and you may sell it at the ‘bid’ price
Real estate also protects the seller via the ‘bid-ask spread’. Let’s hypothecate that you bought a lovely home at the ask price for $200,000 in a nice neighborhood, in hopes of selling it for a $50,000 profit. Something happened somewhere, and real estate peaked, leaving you with no profit, or a slim one. Taxes, insurance, and utilities continue. Do you sit on it at the current ‘bid’ price, or take a chance on the economy or neighborhood? That’s the bid-ask spread, and capitalism at its best.
As far as stocks are concerned, the spread occurs a million times a day. Stocks which are not regularly bought and sold in the marketplace, may have a large spread, because not many people want them, whereas maybe a Ford stock will have but a few cents spread per share bid price.
You buy something at a yard sale you thought to be ‘cheap,’ because you fancied it, and just knew you could sell it at a profit. Turns out that you may have liked it, but no one else does, and it just sits there when you have your own yard sale. It didn’t sell, but you still like it, so it now is in your garage or decorates a closet, awaiting better times or people with better taste.
As far as gold and silver are concerned, when you buy a gold or silver coin, from David, Melissa, or Morgen, we are brokers, and obtain your gold and silver from our supplier, who is the largest distributor in the world. We don’t participate in the spread, but our supplier does, and you do also. We just charge a small fee for our costs plus a small profit. Our supplier protects themself by taking a position in the futures market, to cover price fluctuation risks. As often happens, you notice that gold has gone down $20, so you buy some. Our supplier has himself covered with a futures contract purchase, so if it goes up or down, he is covered. You bought at $20 less than the day before, so you are covered…you think. Since the world’s governments deal in nothing but trust, lies, and bluff, you are going to be just fine in the future, because it is obvious that everything will go ‘up’ in dollars, because the presses never stop or even slow down, even in Trump’s presidency. Your $20 lower price may go even lower, but you know in the long run, you’ll be just fine.
Yard sales, real estate, used cars, et al, are matters of taste and market fluctuations, so you are at risk. Investors all around the world depend on their luck, knowledge, charts, or what have you to make their living. There’s a used car lot in Grand Junction Colorado which has a beautiful Mercedes which has sat there so far for over three months. He paid too much for it probably, and is stuck with it. Many used car dealers take cars on a percentage basis, so their capital isn’t invested. Maybe the Mercedes is, and the owner won’t take a lower bid.
Go to a super market, and you will find bargain shelves with prices at far below cost to the super market. Their capital is tied up in things which won’t sell, and they’d rather get rid of them and take a loss, rather having their capital and shelf space tied up in an ‘ask’ mistake. The sale price below cost is the ‘bid’ price.
You may never have heard about the ‘bid-ask spread’ until now, but it is the basis of just about everything which happens in a free nation with free trading. Just thought you may be interested!
Don Stott don@coloradogold.com