Smart Shopping – ASK
Everyone should know some basic concepts about many things in life. The same is true when it comes to investing activities. Ignorance is not bliss.
During 2018 I will explain some common investing and investment market terms and why they are important for investors who trade ETFs or stocks. I will use AAPL (Apple Inc) and/or the ETF DVY (iShares Select Dividend ETF) for most illustrations. If I use a different stock or ETF it will be to highlight a danger that is not likely to appear in these two investments. Today’s lesson applies for stocks and ETFs.
How many prices are there for any single stock or ETF? It is not an exaggeration to say that some could have over 100 different prices during a single day of trading. If the price per share ranged from $25 to $27 per share, what price would you like to pay? Some investors paid $27. Others paid $26.25 and a few savvy investors paid $25. Let’s start with an example from the retail environment to help you understand the “asking” price.
A LESSON FROM RETAIL: If you shop at Target, there are at least three different prices you can potentially pay for an item. The first two prices are (1) the price on the shelf, or (2) the price on the shelf less the 5% you save by using Target’s REDcard. Therefore, you could pay $25.00 for a kitchen gadget or you could pay $23.75 for it using the Target card at checkout. There may also be a third price. Target “price matches.” If you can show the price for the gadget on the web (or in a sale flier for the same brand of gadget) at a different retailer, you can get that better price. Pretend that a competitor offers the same kitchen gadget for $23.00. If you go to Target’s customer service desk, they will sell the item for $23.00. Then, if you use your Target credit card, you will only pay $21.85 for the gadget. The prices for the one item are $25.00, $23.75, $23.00 or $21.85. There have been times when I got the 4th price, saving $3.15.
The first price is what many pay. The second price is what Target’s savvy customers pay. The third price, when available, is for those who are willing to do a little homework. Obviously, the third method doesn’t make much sense if you have a cart full of product, but it does make sense if you have an expensive item in your shopping cart. The fourth price is the competitor’s price with the 5% Target credit card discount.
THE ASKING PRICE: Now let’s return to the stock market to buy a stock or an ETF. We are going to go into the market to put 100 AAPL (Apple Inc) shares in our “shopping cart.” Someone is willing to sell their 100 shares to you for $170.24 per share. That is their ASK price. You could offer to pay them $17,024 to buy their shares by simply entering a “market” order (that would be unwise!) or by entering a buy limit order specifying the price you are willing to pay. Your order could say “I will buy 100 shares at $170.24 per share but I am not willing to pay more than that.” ALWAYS USE BUY LIMIT ORDERS! If someone snaps up all the shares at $170.24, you might wind up paying more than you thought you would. But you could change your order to specify: “I will buy 100 shares at $169.24 per share.” If someone sells at that price, you would pay $16,924, saving $100. This is also true of ETF trading.
SUMMARY: Ask – The “ask” is the lowest price a seller is willing to accept for a share of stock at a point in time during the trading day. If you enter an order without specifying the amount you are willing to pay, it is likely the ask price is at least how much it will cost you. It could cost you more and might cost you less. Why take this risk? Offer the asking price if you want to buy the shares because you think it is a fair value. However, a little patience can go a long way. Share prices go up and down during a day and even during a week or month. Look at the trends to see if you might be able to buy shares at a better price than the current asking price. Don’t be hasty.