Managing a portfolio
Bid/ask spreads can affect your returns
In this post I will discuss the art of placing orders for the buying and selling of stocks.
One of the costs of managing a stock portfolio is the spread between the asking price of a stock on the market and the bid price. It is a frictional cost. Like other frictional costs, like commissions and fees, it can impact your returns. I tend to be a bit obsessive about reducing frictional costs.
Let me start with something from Philip Fisher. After Ben Graham, Fisher had the greatest influence on the development of Warren Buffett’s investment style.
What we can learn from Philip Fisher
In 1987 Forbes published an interview with Philip Fisher titled “What we can learn from Philip Fisher”. The interviewer notes that Warren Buffett had called Fisher a “giant”. The interviewer had read Fisher’s 1958 book, Common Stocks and Uncommon Profits and sought out Fisher. See also my post: How Warren Buffett was influenced by Philip Fisher
Fisher, who first entered the investment business in 1928 and started his own firm in 1932, wrote: “as I started my business, I found myself constantly battling for ‘eighths and quarters’.” He continues: “I continually placed limit offers with no better reason for a limit than a purely arbitrary decision on my part that I would pay, say, $10 1/8 and no more. Logically, this is ridiculous. I have observed it to be a bad investment habit that is deeply ingrained in many people besides myself but not ingrained at all in others.” (Fisher, P. A. (1958,1996). Common Stocks and Uncommon Profits and Other Writings. Hoboken, New Jersey: John Wiley & Sons, Inc.) p250
I read this many years ago and realized it’s wisdom. Today, prices are in dollars and cents, as in $24.75 rather than in fractions, as in $24 ¾. The wisdom is this. If you have decided to buy a stock, you have decided that it is a superb company available at a very attractive price. So why fuss over whether you pay $24.50 or $24.75. A market order may be the right thing to do. Similarly, if you have decided to sell a stock, there is no sense trying to get the last penny out of the price. When you’ve decided to sell, go ahead and get it done. But there is one thing to keep in mind.
The bid/ask spread
For most companies the individual investor will want to invest in, there is a sufficient volume of trading that the bid/ask spread is relatively small. In such cases a market order is all that is needed.
But sometimes the bid ask spreads are significant and you would be foolish to buy or sell with a market order. Let’s look at an example. The following shows the bid/ask spread for Charles Schwab Corp. after the stock market had closed on April 28, 2025. If you had put in a market order to buy 1000 shares that evening, the order would have been executed the following morning at whatever asking price existed at that time. It could have been $80.99. You would be paying $1 per share more that the close the previous afternoon.
If, on the other hand, you were selling 1000 shares and put in a market order that evening, it might have been executed at $79.36 per share, or $.63 less that the previous closing sale.
These are not big numbers, especially when you plan to hold a stock for many years. But there is no need to suffer this frictional cost.
Before we look at the ways to get around this friction problem lets look at the bid/ask spread as I am writing this. The market is open. The bid ask spread is a few pennies.
This is not unusual. If you are looking at price action when the market is closed, there is often a significant bid/ask spread. Whereas, when the stock market is open, for most investment quality stocks, the bid/ask spread is generally minimal.
The solution
Before placing any order, whether in the evening, on the weekend or when the stock market is open, you should always check the bid/ask spread.
If you place a market order in the evening when the stock market is closed, to either buy or sell a stock, you have to be alert to the spread. The solution is to place your order as a limit order at the last closing price. My discount broker sends me an automatic email alert the moment the order is filled.
I have found over the years that a limit order at the previous day close is almost always filled at the limit price. Problem solved.
Alternatively, you can check the bid/ask spread during the day when the stock market is open and place a market order, if the spread is minimal.
Conclusion
Bid/ask spreads can affect your returns. Investors ignore them at their peril. Why give up a dollar every time you buy or sell a stock. There are easy ways to avoid the problem.
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You can reach me by email at rodney@investingmotherlode.com
I’m also on Twitter @rodneylksmith
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