Content of the material
The bid price of a stock is the highest price that someone is currently offering to buy shares in a company or ETF.
Picture a group of ten people, all wanting to buy a stock.
They each decide how much they’re willing to pay, then form a line in the order of highest price to lowest price. The person at the front of the line is willing to pay the most for a share, so their price becomes the bid price.
If someone wants to sell shares, they go talk to the person at the front of the line to complete the transaction.
When that person’s order is fulfilled, they leave the line and the price of the next person in line becomes the bid price. The next seller talks to the next person in line, whose price becomes the bid price.
In the real world:
Bid prices can change regularly as new traders show up and are willing to pay higher prices or people looking to buy decide not to buy, and the bid price drops to the next highest offer.
The bid-ask spread, or the bid and ask spread, is the difference between the bid price and the ask price of an instrument. For example, the difference in price between someone buying a stock and someone selling a stock represents the bid-ask spread.
Both the bid and ask prices are displayed in real-time and are constantly updating. The changing difference between the two prices is a key indicator of the liquidity of the market and the size of the transaction cost.
High liquidity in a financial market is often caused by a large number of orders to buy and sell in that market. This liquidity enables you to buy and sell closer to the market value price. Therefore, the bid-ask spread tightens the more liquid a market is. The opposite is true when the market is less liquid. In this case, the spread increases as it’s harder to sell and buy near the market value due to a lack of volume in trades.
Sometime you bid… sometimes you ask
So there you have it – bid and ask, explained. Understanding the basics of bid and ask are important to help you understand exactly how trades are processed. So next time you make a trade, remember: don’t look at the last price like an amateur; instead have a look at the bid and the ask!
Try the WSS course: Understanding Advance Technique to learn more about Bid and ask prices, as well as other advanced trading techniques.
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The Bottom Line
There are ways around the bid-ask spread, but most investors are better off sticking with this established system that works well, even if it does take a little ding out of their profit. If you consider branching out, experiment with a paper-trading account before using real money.
Advanced strategies are for seasoned investors, and beginners may find themselves in a worse position than they began. This isn't to say that you won't ever get to the point of using them and maybe even excelling with them, but you're probably better off sticking to basic rules when you're starting out and just getting your feet wet.
You can see the bid and ask prices for a stock if you have access to the proper online pricing systems. You’ll notice that they are never the same. The ask price is always a little higher than the bid price.
You’ll pay the ask price if you’re buying the stock, and you’ll receive the bid price if you are selling the stock. The difference between the bid and ask price is called the “spread.” It’s kept as a profit by the broker or specialist who is handling the transaction.
The broker's commission is not the same commission you'd pay to a retail broker.
In actuality, the bid-ask spread amount goes to pay several fees in addition to the broker's commission.
Certain large firms, called "market makers," can set a bid-ask spread by offering to both buy and sell a given stock. For example, the market maker might quote a bid-ask spread for a stock as $20.40/$20.45, where $20.40 represents the price where the market maker would buy the stock, and $20.45 is the price where the market maker would sell the stock.
The difference, or spread, benefits the market maker, because it represents profit to the firm. Because prices constantly move, especially for actively traded stocks, you can’t know what price you’ll get in a trade if you’re a buyer or a seller unless you use specific market orders when trading the stock to lock in a certain price.
Bid-Ask Spread Example
For example, let’s say an investor wants to buy 1,000 shares of Company A for $100 and has placed a limit order to do so. Let’s assume another investor has placed a limit order to sell 1,500 shares at $101. If these 2 orders represent the highest bid and the lowest ask price in the market, the spread on this stock is $1.
The basic order types are market and limit orders. Buy and sell market orders are filled at the best available ask and bid prices, respectively. For example, if you enter an order to buy 100 shares at market and the best available ask is $10, you will pay $1,000 plus commissions to fill your order. Buy and sell limit orders are filled only if there is a sufficient quantity of shares available at the specified ask and bid prices, respectively. Stop orders become market orders at the specified stop price. Stop-limit orders are limit orders at the specified stop price and are executed at the limit price.
Markets may move up or down by a percent or more during a single trading session, sometimes within minutes. Bid and ask prices change frequently in this environment. To avoid a fill at the wrong price, place limit orders and monitor the order status closely. For example, if you place a market buy order for a stock when it is at $10, your order could be filled at $12 or more in a rapidly rising market. While this might turn out to be a profitable trade if the price continues to rise, a sharp reversal could bring the share price down to $10 by the end of the trading session.
The Bid and the ask
There are always two prices to any trade:
- The bid: the price that someone is willing to pay for a share
- The ask: the price that someone is willing to sell their share for.
The stock market has bid and ask prices for each and every stock. You can find this on the stock quote page on WallStreetSurvivor.com. (NOTE: you have to be logged into your account to view stock quotes)
The Bid Price
The bid is the price someone is willing pay for a share of Google.
Check out Google’s quote. If you owned Google’s stock and wanted to sell it you’d want to know what someone would be willing to pay for it. Easy. Look at the bid price. The highest that someone would be willing to buy Google is $581.25. So if you decided to sell your stock, you’d be able to sell it for $581.25.
Practice by: selling one of the stocks in your portfolio. Mark down the bid price from the quote page, and check out what price your sell order is filled at.
The Ask Price
The ask is the price someone is willing to sell a share of Google for.
Now if you wanted to buy some shares of Google, you’d want to know how much someone would be willing to sell it for, right? So have a look at the ask price. The lowest someone is willing to sell Google for is $581.51. So if you wanted to buy Google right now, you could buy it for that price.
Practice by: buying 10 shares of Google on Wallstreetsurvivor.com. Remember, don’t look at the last price, look at the ask.
While you usually only see a single price quoted for stocks traded on the stock market, that price doesn’t tell the whole story.
The bid and ask prices are the prices that investors should really care about, because they show the real prices at which you can buy or sell a share.