Q: Why, whenever I have a transaction for either a mutual fund or stock, do I buy it for the high price of the day and sell it for the low price of the day. Is the SEC monitoring these specifics or is this something that the government should also look at? Is this another can of worms for the worms? — Duane R., Chicago
A: The difference in the two prices you’re referring to is the “spread,” and it represents the commission that is paid to the broker who executes your trade. In theory, buyers and sellers could be matched electronically. But as long as the trades are handled by human beings, they have to get paid somehow.
While fees are regulated, they vary a great deal, and high fees can quickly sap your fund of any investment gains. The NASD limits sales loads to 8.5 percent, for example, which is more than many funds are making these days.
The “spread” is one of the most visible fees: You just compare the “bid” (the price you’ll pay to buy a share) and the “ask” (the price the seller gets) and the difference represents a commission you pay. You may pay a “sales load” — the broker’s commission — on the front-end (when you buy) or back-end (when you sell) or both.
But the “spread” is only one of the costs you’ll encounter when you invest in mutual funds. The problem many individual investors have is figuring out just how much they’re paying — and where all these fees are going. That’s one of the ways that New York Attorney General Eliot Spitzer wants the industry to clean up its act — by making it much easier to figure out what you’re paying.
Until that happens, you’ll just have to dig further to find the other fees and expenses buried in the fund’s prospectus — that mind-numbing document written by lawyers that fund companies know you’re just going to throw away.
Each time the fund manager buys or sells a stock in your fund, for example, there’s a commission paid to whoever executed that trade. Funds with high “turnover” — heavy trading of its portfolio — will pay more in commissions that more stable funds. You may also be charged so-called 12b-1 fees for expenses like advertising and marketing — for all that useless junk mail your fund sends you every month trying to get you to buy other funds from the same company.
The list goes on; for details on other fund fees you may be paying, check out the Securities & Exchange Commission’s explanation.
One of the easiest ways to compare funds is to look at the so-called “expense ratio.” Though not all fees are covered, this is supposed to tell you what percentage of the funds assets are being used to pay fees and commissions to the fund manager and the various traders and brokers who get their cut. The higher the expense ratio, the more likely your fund is to lag other funds in its category, because there’s no connection between the level of fees you pay and the funds performance. In this case, you don’t necessarily “get what you pay for.”
FAQs
A: The difference in the two prices you're referring to is the “spread,” and it represents the commission that is paid to the broker who executes your trade.
Why are sell and buy prices different? ›
The difference between the Buy and the Sell price of a stock is called the spread. The spread is the brokers margin for making the trade and can be an indicator for the investor of the liquidity of a stock. A stock which is only traded in low numbers or is a difficult trade will have a larger spread.
Why are prices different for the same product? ›
Price discrimination is a selling strategy that charges customers different prices for the same product or service based on what the seller believes it can get the customer to agree to. In pure price discrimination, the seller charges each customer the maximum price they will pay.
Why is the buy and sell price different in forex? ›
The difference between the buy rate and the sell rate is the trader's gain or loss on the transaction. Before exploring forex spreads on FX trades, it's important to first understand how currencies are quoted by FX brokers.
What's the difference between buying price and selling price? ›
The selling price is the price being asked by the retailer. The purchase price is the price you actually pay.
Why are buying and selling rates different? ›
The selling rate is always higher than the buying rate because foreign exchange traders will take advantage of the difference in selling and buying rates. The selling rate is used to transact in the destination country of origin.
What is the difference between buying and selling? ›
"Buy" and "purchase" are generally used interchangeably and mean to acquire something in exchange for money or other payment. "Sell" means to give up ownership of something in exchange for money or other payment. The main difference is the perspective or the direction of the transaction.
What is the reason for price difference? ›
Per capita income, wage compression, wage dispersion among low-wage workers, short-term exchange rate fluctuations, and tradability of products explain price differences across countries.
What are three things that can cause the price of a product to be different? ›
Prices can change for many reasons (technology, consumer preference, weather conditions). The relationship between the supply and demand for a good (or service) and changes in price is called elasticity.
Is it legal to have different prices for the same product? ›
Under California Business and Professions Code Section 12024.2 BPC, engaging in inaccurate or deceptive pricing is a criminal offense that can potentially be filed as a misdemeanor.
Key Takeaways
The bid price refers to the highest price a buyer will pay for a security. The ask price refers to the lowest price a seller will accept for a security. The difference between these two prices is known as the spread; the smaller the spread, the greater the liquidity of the given security.
Why are prices different on different exchanges? ›
Different exchanges have varying prices due to differing supply and demand. Read on to learn more. Traders who use one crypto exchange might not be aware that the prices for their preferred digital assets will be different on another exchange.
What is the difference between the buy rate and the sell rate? ›
In the retail currency exchange market, different buying and selling rates will be quoted by money dealers. Most trades are to or from the local currency. The buying rate is the rate at which money dealers will buy foreign currency, and the selling rate is the rate at which they will sell that currency.
How do traders know when to buy and sell? ›
Before buying, they'll look for a stock to fall to “support,” a stock price at which other buyers step in to buy, and the stock is more likely to rise. To sell, they'll look for when the stock hits “resistance,” a price where more traders start selling and the price is more likely to fall.
What is the difference between buy price and buy value? ›
Price is what you pay and value is what you get
Especially, when it comes to stocks, market price is based on a mix of subjective and objective factors. What you actually pay for the stock is the price or the market price of the stock. But value is what is resident in the asset.
What is the difference between selling price and value? ›
Focus: Value selling focuses on understanding and fulfilling the specific needs and preferences of buyers, while price selling primarily emphasizes offering the lowest price.
Why is there a difference between the buy and sell price of gold? ›
Why is the gold buying price lower than the selling price? In gold market, the gold selling price is usually lower than gold buying price. This is because the buying price includes various costs such as GST and nominal convenience charges, whereas, the selling costs does not include such deductions.
Why is buy higher than sell? ›
Buyers and sellers affect supply and demand – and therefore the price – of an asset. At any given time, one group tends to outweigh the other, and that's the primary reason the price of a market fluctuates. When the buyers outweigh the sellers, demand for the market rises. As a result, the price of the asset rises.
Why are prices different online than in store? ›
Online pricing and in-store pricing can vary. Typically, online prices are lower to account for shipping costs and the cost of running a physical store is higher, so their prices are higher. If an online item is available at your local store, you can place a store pick-up order to receive the online price.
