What Causes A Large Bid-offer Spread?

What Causes A Large Bid-offer Spread?

1 Answer

  1. A lot of factors can make bid-offer spread larger, these factors influence it in both the ways, by which I mean it can increase it and at the same time decrease it. Firstly, the stocks and indexes that have large trading volumes will have narrower bid-ask spreads than those that are infrequently traded. Hence large companies will have tiny spread while the small companies wider. It is so because when a stock has a low trading volume, it is considered illiquid because it is not easily converted to cash. As a result, a broker will require more compensation for handling the transaction, accounting for the larger spread. Secondly, a stock’s price also influences the bid-ask spread. If the price is low, the bid-ask spread will tend to be larger. The reason for this is again linked to the idea of liquidity. Another important aspect that affects the bid-ask spread is volatility. Volatility usually increases during periods of rapid market decline or advancement. At these times, the bid-ask spread is much wider because market makers want to take advantage of and mint some money out of it. The reason is mainly increasing value of stock, investors are willing to pay more, giving market makers the opportunity to charge higher premiums.

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