How shares are traded

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9. The spread

The spread is closely related to normal market size, and both of them are symptoms of a stock's liquidity.

• Just as brokers give a stock with low liquidity a low NMS, so they also give it a wide spread

The wide spread gives the market makers flexibility when they go out into the market to secure the shares that you want to buy.

Suppose shares in Tinyco have a mid-market price of 50p. If the market makers quote a narrow bid/offer spread (48p and 52p), and you place an order for 4,000 shares at 52p, they face the nasty possibility of being unable to buy the shares for less than 52p. Why? Because it's such a small company with not many shares in issue, and daily trading volumes are small.

In contrast, a large company whose shares are traded in volumes of 5m per day, will have a fairly narrow spread, because the market maker will have no trouble fulfilling an order at a predictable price.

In fact, the largest companies are traded by brokers using the SETS 'order book' system, which makes the prices even more predictable. The order book cuts out market makers altogether, handling all trading by computer. Most FTSE 100 companies are traded this way. The important thing from your point of view is that:

• Order book stocks usually have narrower spreads than stocks traded via market makers, because their shares are much more liquid.
• The prices of order book stocks can lurch violently early or late in the day, so avoid buying or selling them at those times.

1. The role of brokers 2. What type of broker do you want? 3. Choosing a discretionary or advisory broker 4. Choosing an execution-only broker 5. Opening an account with a broker 6. Placing buy/sell orders by telephone 7. Placing buy/sell orders online 8. Normal market size 9. The spread 10. Contract notes 11. Settlement 12. Conclusion

• First Steps in Shares