Understanding Bid and Ask Prices

How to get the best prices buying and selling stocks – Bid Price and Ask Price

Imagine you’re at a flea market. You head over to one of the stands and see a baseball card that you want. And even though you really want it, you won’t pay just anything for it. Instead, you want the best (lowest) price for it. Because it’s a market, you’re able to negotiate for it.

The seller sets his price at $30. That’s his ask price.

You are willing to pay $20 for the card. That your bid price.

You can choose to to raise your bid, wait for the seller to drop his ask or go find another seller. This is exactly how bid and ask work on the stock market. Except there are millions  of traders buying and selling thousands of different stocks every day.

At its core “bid” is the highest price someone is willing to pay to buy a stock. “Ask” is the lowest price someone is willing to sell their stock for.

But first.. the “last price”

Before we dive into the bid and the ask, we should explain the “last price”. When you hear someone say that Apple is trading at $400, it doesn’t mean that you could buy apple for that price. What that price actually refers to is the last price that it was traded at. There is no actual current price – that’s what the bid and the ask are for.

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.

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Order Types

If “set it and forget it” is your kind of investment strategy, than order types are for you. Orders: managing your portfolio so you don’t have to.

Imagine having a full-time stock broker sitting there watching the market, poised to buy or sell stock as soon the price reaches a certain level. That’s precisely what market orders do.

When it comes managing your portfolio, orders aren’t just classified as either buy or sell. In particular, orders can be classified according to the price at which the broker will execute them: market and limit orders.

Market orders are orders for buying or selling at the current market or best available price in order to get the transaction done immediately. When it comes to market orders, there’s a difference between bid and ask prices.

Bid And Ask Prices

If you’re looking to sell your Google shares as quickly as possible, you should sell down and hit the current bid (buy) price. Doing so will ensure your order is instantly executed because it’s the highest price at which people looking to buy Google shares.

On the other hand, you should buy up to hit the current ask (sell) price if you’re looking to immediately get your hands on shares of Google. Doing so will ensure that your order is immediately executed because the current ask price is the lowest price at which people holding shares of Google (or just about any other stock) are currently willing to sell at.

Keep in mind though that a stock’s last-traded price isn’t always the price at which the market order will be executed. It’s possible that the last executed trade prior to your market buy order (hitting up the ask price) was one where a seller hit down the bid price). If that happens, your market order will be done at a price that’s higher than the last traded price. Conversely, if you execute a market sell order (hit down the bid price) and the last trade was one where the stock was bought up at the ask price, the price at which your market order’s executed will be less than the last traded price.

Using Limit Orders – For more advanced (but curious) traders

 

A limit order, on the other hand, is one where you set a limit regarding the price at which you want to transact a stock. If you set a limit of $ 750 in buying a share of Google’s stock (the buy limit), such an order guarantees you won’t pay more than that amount per share. It’s even possible to pay less! When you’re selling your Google shares and you set a limit of $800, it means the order will be executed at a minimum price of $800 per share, possibly even more.

In the two examples above, the buyer and the seller had no choice but to trade at the listed bid and ask price. But in practice you have the ability to choose your bid and your ask using limit order (Note: It’s for slightly more advanced traders, so feel free to skip).

Look at the Google quote above. The bid is $581.25 and the ask is $581.51. If you wanted to buy Google, you would look at the ask price.

Now, imagine you only have $575 in your account and you think Google’s price will go down. You would set a limit buy order with a target price of $575. This way, whenever the ASK price of google goes down to $575, your order will execute. The opposite is true if you wanted to sell a stock only at a certain price. You would set a limit sell order, and wait till the BID price reached it.

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!


 

Still unclear?

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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