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  5. MISC: My question concerns the significance in a stock’s price bid & ask price difference. [Miscellaneous]
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Q: My question concerns the significance in a stock’s price bid & ask price difference. Today LMN’s bid ask difference is .15 cents while BCE’s is .01 cents. Question 1 is why do stocks have varying bid ask differences. Question 2 is it better to buy stocks with small bid ask differences. And question 3 does a third party prosper if a stock has a large bib ask difference. Thanks … Cal
Asked by cal on March 08, 2024
5i Research Answer:

1. Stocks have varying bid ask spreads due to factors such as liquidity, company size, volatility, and general market conditions. Typically larger companies have smaller bid-asks as the market of buyers and sellers is much larger than for small companies. That also ties into liquidity, as a stock is more liquid when there are more buyers and sellers in the market. These factors are displayed in your example, when looking at the size difference of LMN and BCE.

2.  Typically, smaller bid-ask spreads are preferable for investors because that indicates lower transaction costs. When the spread is narrow, investors can buy and sell shares closer to the midpoint between the bid and ask prices, reducing the impact of transaction costs.

3. Market makers and other intermediaries typically profit from large bid-ask spreads by buying at the bid price and selling at the ask price, capturing the spread as profit. This is mainly achieved due to the size and economies of scale that these companies are able to capture.