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mitted directly through a computerized network to the Nasdaq computers for execution. |
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A note: you will hear the term "listed stock" that refers to stocks traded on the Exchanges, primarily the NYSE. This term is not used with Nasdaq stocks. The Nasdaq is not a physical exchange and it's stocks are not called "listed." |
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Instead of specialists who are involved in a small percentage of the total trades on the NYSE, every execution on the Nasdaq computers is made by a market maker. (Don't let us confuse you here . . . later in this chapter you will see that with ECNs you can execute Nasdaq orders without using the Nasdaq computers or the market makers.) |
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For every stock traded, there are two prices quoted: a bid and an ask. |
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A bid is an indication of a willingness to buy a security. |
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An ask (or an offer) is an indication of a willingness to sell a security. |
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Sounds simple enough, doesn't it? But new traders often get confused when they go to the market. This is because stocks are sold to you at one price and they are bought back from you at a slightly lower price. The difference between these two prices is called the spread, which will be discussed shortly. |
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Specialists and market makers make money by filling customer orders as follows: |
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When someone wants to buy, they sell the trader the stock at the higher price, the ask. |
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When someone wants to sell, they buy the stock at the lower price, the bid. |
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They do this all day long, essentially making the spread in exchange for providing liquidity to the market. |
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Figure 10.2 shows a stock window showing the ask and bid prices for Microsoft shares. To buy MSFT at this moment, you would pay 120 1/2 because you have to buy at the price the market maker (in this case ABSB) is asking to sell its shares to you. |
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To sell MSFT, you would receive 120 3/8 because that is the price the market maker (either GSCO or MSCO) is bidding for your shares. That is all they are willing to pay for your stock at this moment. |
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