Have you ever visited a stock market or an exchange platform? Or have you ever used a meta trader app? You may be confused about the different prices used to indicate a single stock or market value. Well between those several metrics of prices lies the bid price and quote the prices of the broker or exchange you use. From, how this sounds, it entails that the bid and ask prices represented on the stock quote differ between exchanges.
However, what do the bid and ask prices represent on a stock quote? Long-time investors should have gotten familiar with these terms and know what they mean. Meanwhile, if you don’t learn it immediately, you’d learn it as you keep in touch with the stock market or any digital financial market-related assets.
Nonetheless, we’ve carefully elaborated on what both the bid and ask prices represented on the stock quote mean. We also explained its effect on the market. Therefore, endeavor to read this page thoroughly to know all you need about bid and ask prices.
What Is The Bid Price?
The bid price simply refers to the price that an investor can willingly pay for a security. Furthermore, if an investor wants to sell a stock, he/she would need to specify how much the stock is available for those willing to pay for it. This can be done by looking at the bid price. Hence, the bid price shows the highest price that somebody is willing to pay for the stock.
What Is The Ask Price?
The ask price represent the price that an investor willingly wants to sell a security. Thus, if an investor wants to buy a stock, they need to know how much the owners wants to sell it for. Hence, they’d need to look at the ask price, which stands for the lowest price someone wants to sell the stock for.
How Are the Bid and Ask Prices Determined?
The market automatically sets the “bid and ask” prices. In particular, the actual buying and selling decisions of the people and institutions who invest in the asset sets the prices. For instance, if an investor wants to buy a stock, they need to determine how much available people willing wants to sell it for. This includes the ask price, the lowest price someone is willing to sell the stock for. Meanwhile, if demand moves faster than supply, then the bid and asks prices will often gradually shift upwards.
On contrarily, if supply moves faster or overtakes demand, the bid and ask prices will drift downwards. While the difference between the bid and ask price spread is determined by the overall level of trading activity in the security. Higher activity leads to narrow bid-ask spreads and vice versa.
What Do the Bid and Ask Prices Mean in a Stock Quote?
Bid and ask prices in a stock quote simply still stand for the market terms representing supply and demand for a stock. Where the bid price on the quote represents the highest price someone is willing to pay to own a share.
On the other hand, the ask represents the lowest price at which someone is willing to sell a share. We refer to the difference between the bid and ask as the spread. While a stock’s quoted price represents the most recent sale price.
Example of Bid and Ask Prices
Consider speculative Company XYZ, having a current best bid of 100 shares at $9.85 and a current best ask of 200 shares at $9.95. A trade will not occur until a buyer meets the ask or a seller meets the bid.
Then, suppose an investor places a market order to buy 100 shares of the company XYZ. The bid price would become $9.95, while people will continue to trade the shares until the order is filled. Once these 100 shares trade, the bid will revert to the next highest bid order, which is $9.85 in this example. Also the spread in this example is 1.
What Is a Bid-Ask Spread and How Does It Relate to Liquidity?
A stock’s bid-ask spread sometimes called the spread simply refers to the difference between the bid and ask prices. Whenever a bid-ask spread appears smaller for a given security, the more liquid that security is. While, the larger the spread, the less liquid it has. In other words, stocks with more total buyers and sellers or high market cap tend to have smaller spreads and thus easier to trade efficiently.
Who Benefits From Bid-Ask Spreads? Where Does the Difference Go?
It may appear confusing that a trader has to sell a stock at its bid price instead of its ask price. This happens so because, in reality, individual traders don’t buy from or sell to other individual traders. They exist invisible middlemen in the market known as the market makers facilitating each transaction. They sell shares to traders who need to buy. and they buy shares from traders who need to sell.
Market markers simply exist to provide the necessary liquidity for individual traders to execute buy and sell orders instantly. This is instead of having to wait to find a matched trader in the opposite position. So, at any given time, the market makers hold enough shares of the company in question that they can perform both buy and sell trades almost instantly.
Consequently, in exchange for the service they offer, the market makers collects the gains from the bid-ask spread from each transaction.
Frequently Asked Questions About Bid and Ask Prices
What Does Bid Size and Ask Size in Stocks Mean?
The bid size and ask size define the number of stocks or other securities that traders have the willingness to buy or sell at a certain bid price or ask price respectively. They usually represent them in “lots sizes” of 100s. Thus, an ask size of 4 means 400 units available for that price. The wider the bid or ask size shows the more liquidity the security has in the market.
What Is the Difference Between the Bid and Ask Price of a Stock and the Last Price?
The last price includes the execution price of the most recent trade you entered. So, whenever a trader places a market “sell or buy” order, the price he/she entered the trade will become the new last price.
What Is the Difference Between the Bid and Ask Price of a Stock?
Technically we refer to the difference (subtracting the bid price from the asking price) between the bid and ask prices for a stock as the spread. Typically speaking, the larger or wider the spread, the lesser liquidity the stock has. In conditions where the stock appears illiquid, a danger may occur that a large order could cause the price to fall due to slippage.
What Does Bid and Ask Mean in Stock Trading?
In stock trading, the bid price stands for the highest price that a buyer is ready to pay on a particular security, while the asking price represents the lowest price that the seller will accept. Both the bid and ask constantly change over a trading day.
Conclusion
By now you should have gotten more clarity between the bid and ask prices and their imperative. The spread includes one of the essential features that make up a good stock broker or exchange. Any stock broker offering a wider spread makes it more difficult to start earning early profits from trade entries. The spread includes the difference between the bid and ask prices.
Hence, before selecting any broker to use, endeavor to compare spreads to know the best broker to patronize.