In the stock market, you may often hear the term "spread". The term spread relates to price fractions and bid-offers. However, do you know what a spread is?
Before you understand spreads, it's a good idea to know the price fraction and bid-offer first.
Price fraction is a price multiple limit set by the Indonesia Stock Exchange (IDX). For more details about the price fraction rules, please read the post: Meaning and Illustration of Stock Price Fractions. While the bid-offer according to its meaning, means the demand and supply of market participants for a share, the amount of which has also been regulated in the price fraction. If you don't understand bid and offer in the stock market, please read: Stock Market Bid-Offer - Part I. - Stock Market Bid-Offer - Part II. - Stock Market Bid-Offer - Part III.
In the stock queue system, bid-offers will appear that are entered by market participants. For more details, please see the description of bid-offers in the stock market.
These are bids and offers during trading hours. Market participants will enter the desired buy and sell prices into the trading system. Referring to the new price fraction rule, this share price fraction is included in the price group of Rp50-2,000, with a price fraction of Rp5.
Pay attention to the bid-offer queuing system above, that when the top bid price (best bid) is at 1,780, the second bid price is 1,775 and so on. Likewise with the offer price. The difference between the bid and offer prices is called the spread. If you look at the bid-offer, the spread always follows the price fraction (as much as the price fraction), which is the fraction of Rp.
So, simply spread is the distance between bid-offer prices. In general, for stock bid-offers, the spread is a fraction of the price.
But, have you ever seen a queue of bid offers whose spreads are very far (not following the spread of a price fraction)? Why did it happen? Pay attention to the stock queue system with the HERO code below.
HERO's share price above is the price group of Rp50-2,000, with a price fraction of Rp5. But, if you look carefully at the queue above, there are many holes in the queue. Note, HERO's best offer is 1,250, but the queue below it is 1,280. In fact, if you follow the price fraction, the queue below should be 1,255. Likewise, the queue for the best bid is 1,200, and the queue below it is 1,165. Supposedly when referring to the price fraction, the queue is 1,195.
Why this big spread can happen? Large spreads (large distance between bid and offer) can occur for 2 reasons:
First. The stock is illiquid (less interested in buying and selling). Traders who are interested in buying want to place a buy order at a very low price. Meanwhile, traders who intend to sell, want to place a sell order at a very expensive / high price. This causes a gap between the bid-offer price gaps, resulting in a large spread.
If you look at the example above (I took the bid price example). Traders want to buy at very low prices, namely at 1.165 prices, and traders are not willing to buy at 1170, 1.185, 1.195 prices, so there are no orders for these prices, eventually a large spread arises. On liquid stocks, you will hardly find a large spread like this (usually the spread follows / is a fraction of the price).
Second. You will find a lot of large spreads during the early hours of the market opening. This is because during the early hours of the stock market opening, there are still not many traders who enter the market to queue, so there are traders who want to buy at very low prices, and other traders who want to sell at very high prices. So there is a sparse spread. When market hours continue to run and more traders enter, the empty price gap will usually be filled.
So, if you find stocks with wide spreads, you should avoid these stocks. As I have already said, stocks with wide spreads are illiquid stocks or lack interest. Why trade in stocks that have less demand?
Another reason is because stocks have far spreads, so you will find it difficult to sell at high prices (your order will not necessarily be accomplished). This is because buyers only want to buy at a very low price.
