Beating the spreads

Hi guys, I'm new to trading and I can't seem to find anyone discussing this topic in detail, so please help me understand this:

The bid/ask spreads for most major stocks (eg. Apple) are about 0.08%. So, if I were to buy Apple stocks, my position would be -0.08% right from the start. Let's say I were to close my position a day later, I would essentially have to pay another "fee" of 0.08%.

Basically, for each trade I execute, I'd have lost 0.16%. Is this right? Does this mean that if I were to execute 100 trades a year, that would amount to a whopping 16% and I'd have to beat that in order to even see any profits at all?

Do institutional investors, unlike retail investors, have any advantage in terms of the bid/ask spread that they'd have to pay?

What your referring to is called "slippage". As soon as the markets open, the bid and ask on high volume stocks like Apple will tighten up. That, and you've overestimated with your numbers, but basically if you don't expect the stock to move enough to cover the spread, or the spread is so big that its almost impossible to cover, then the trade, and not the spread, is the problem.

Ummmm I think your math is off.....each penny you give up on a 100$ equity is only 1$ per 100 shares....or .01% per share and there is no reason you should be giving up 8 cents to get a fill in APPL.

What you are referring to I call "liquidity". And yes it is very important. It is in fact the very first criteria I use before going any further in my decision about a trade. With a stock like APPL you have tons of liquidity. Even after hours the bid/ask spread is only 3 cents wide. What you are missing is that you don't always have to buy off the ask and sell off the bid. You also have what we call "mid-price"...this is where you will get your fair market. But when the market is a penny wide I make my offer at the bid and wait for the fill. If it doesn't fill when I want I might adjust another cent. When you are trading through larger brokerages you can expect price improvement as much as 40-50% of the time with equities and 30-40% of the time with options. This is because the market makers actually compete for the order flow from the brokerages...and brokerages will favor market makers who provide better fills for their customers.

If you are wanting to buy 100 shares of APPL and the bid is 119.90 and the ask is 199.93 I would make my offer at 119.90 at first and see if I get a fill. A 100 lot from a big brokerage like TDA and others will go to the head of the line...believe it or not...ahead of say a 1000 share lot and fill first. The reason being that it is preferential for them to fill a whole order of 100 than half of one 1000 share order and none of the others.

So to answer your question ...yes....the institutionals, or market makers make money on the spread....but that's their job...to provide liquidity...and on the most liquid markets they make very little but do enough volume that they make something.

But you gotta remember...20 years ago the bid/ask spreads were huge. Today we can thank the algorithmic or high frequency traders and machines for penny wide markets. Giving up a penny or two occasionally on tight markets is not a big deal...the liquidity providers have to have some sort of incentive to take the other side of anything we do.

There are those that understand market making more than I do on here so if they can correct or elaborate on any of that I would be appreciative.

2 great responses and while to me every penny would count I agree with the 2 previous posts, if that were a concern then you shouldn't be buying at all. I hope whatever your investing is going to "net" you a whole lot more on a long position. The only place I would see it being a problem would be IF the stock were a micro cap in my opinion.