Updated on September 20th, 2019
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When looking at a stock quote, you will typically see a stock’s current price, volume, and the bid and ask prices. Often investors attempt to buy or sell a stock, focusing solely on the stock’s current price. They place an order at the stock’s current price and become confused why their buy or sell order isn’t executing. This is primarily due to the investor not paying attention to the bid and ask prices. The stock’s current price seems straightforward enough, but what do the bid and ask mean and why are they important?
The bid and ask of a stock are the best potential prices that buyers and sellers are willing to execute a deal at. Each stock will have both a bid and ask price, with the bid being the highest price buyers are willing to pay for a stock and the ask being the lowest price sellers are willing to sell a stock.
These two prices are determined from the buy and sell orders submitted by investors from all over the world. When someone wants to buy a stock, they will receive the stock at the ask price since this is the lowest price sellers are willing to give it up for. When someone wants to sell a stock, they will receive the bid price since this is the highest price buyers are willing to pay for a stock. In other words, a trade between two investors is only made when a seller’s ask price meets a buyer’s bid price and vice versa.
The bid and ask are also both accompanied by a size # which lets you know how many shares are available at the bid and ask prices. Throughout a trading day, a stock can have multiple combinations of bid and ask prices and sizes as they are updated in real time just like the stock price itself. At any given time, only the best possible prices to buy and sell a stock will be shown as the bid and ask.
When looking at the bid and ask of a stock, it is also important to pay attention to the spread between the two. The bid-ask spread is simply the difference between the bid and ask price of a stock at any moment. A small bid-ask spread means the stock is highly liquid and can easily be traded because the prices wanted for buying and selling the stock are close to each other. A large bid/ask spread means the prices wanted for buying and selling the stock are farther away from each other, meaning the stock is not as liquid. This means an agreement between a buyer and seller will be less likely.
Bid-ask spreads are maintained and influenced by Market Makers to keep markets running efficiently. Market Makers are firms or individuals who buy and sell stocks to create a market, maintain liquidity, and hopefully return a hefty profit for themselves.
For example, if you wanted to sell 10 shares of ZMT’s Camera Company at $100 a share, there would have to be someone wanting to buy 10 shares of ZMT’s Camera Company around the same time and at the exact same price you wanted to sell them at. Frequently this exact match is not met and a Market Maker would buy your 10 shares at the ask price of $100 a share. The market maker would then try to sell the 10 shares to another investor at a bid price above $100 and pocket the difference. This provides a Market Maker with a profit while also giving you a better opportunity to buy and sell stocks immediately at your desired price regardless if there is another investor matching your order.
When buying and selling stocks, make sure you are aware of the bid and ask prices! This will save you some confusion on why your orders might not be executing while also providing you a deeper look at what prices investors are willing to trade the stock for.