If you’ve ever looked up a stock quote, you’ve probably seen bid and ask prices. The bid price is the price investors are willing to pay for an asset. The ask price is the price at which investors are willing to sell the asset. The spread represents the difference between the two prices.
Definition
Bid and ask defined
Bid and ask is a two-point price quotation that shows you the best price investors are willing to offer for a transaction. The bid is the highest price buyers are willing to pay for a financial security, such as a stock, at a given point in time. The ask is the price at which the investor is willing to sell the security. A bid price is almost always lower than an ask price.
The difference between bid and ask is called the bid-ask spread. If a stock’s bid price is $20 and the ask price is $20.10, the bid-ask spread is $0.10.
When you place a market order, you’re agreeing to buy at the next available ask price or sell at the next available bid price. The order goes through as long as there’s a bid (if you’re a seller) or an ask (if you’re a buyer).
But a limit order is only fulfilled if the bid or ask price hits a specified threshold. Suppose you’re trying to sell your shares of Company A, but you place a limit order specifying an ask price of $20 a share. If the bid price is only $19.99, your order won’t go through.
What it means for investors
What the bid-ask spread means for investors
When an asset is highly liquid, the bid-ask spread may be close to zero because the market can efficiently match willing buyers and sellers. Let’s use shares of Amazon (AMZN -0.27%) as an example: At the stock market’s close on Feb. 23, the bid price was $95.83 and the ask price was $95.84, giving us a bid-ask spread of just $0.01.
Thinly traded securities, such as penny stocks, often have enormous bid-ask spreads. Because these stocks are traded less frequently, the supply vs. the demand may be out of whack. Plus, these stocks typically trade in over-the-counter markets instead of a major stock exchange, making it harder to match buyers and sellers.
Sometimes, these bid-ask spreads will look minimal since they may only amount to a few cents.
But if a stock has a bid price of $0.50 and an ask price of $0.55, that $0.05 spread amounts to 10% of the bid price. If you bought at the ask price and then immediately resold at the bid price, you’d lose 10% off the bat.
Retail traders who only buy and sell mainstream stocks probably won’t pay a lot of attention to the bid-ask spread, though, since it will constitute such a minuscule fraction of most investments. But bid-ask spreads are a huge source of profit for market makers, which are financial institutions that stand ready to buy or sell securities at a quoted price.
When a market maker receives a buy or sell order, it executes the transaction immediately even if it doesn’t have a corresponding buyer or seller lined up. Instead, it may use its own shares to fulfill buy orders or add shares to its inventory when receiving a sell order. Market makers earn money from the bid-ask spread because they’re constantly buying at the bid price and selling at the slightly higher ask price. The difference doesn’t amount to much for ordinary investors, but when it’s applied to millions of transactions, it adds up to serious profits for financial institutions.
How to Start Buying Stocks: Step by Step GuideLearn six steps to start buying stock, including researching the ones that interest you and deciding how many shares to buy.
A Beginner's Guide to Understanding Financial NewsSifting through huge amounts of financial news can be challenging. How do you make sense of it all?
Financial New Year's ResolutionsCheck out these eight resolutions from experienced investors to give you some inspiration.
Example
Example of bid and ask
Here’s an oversimplified example of how bid and ask works. Suppose you want to buy 100 shares of a publicly traded company called Bluth’s Bananas. You see the bid price of $10 and an ask price of $10.02. If you’d placed a buy order with your broker, you’d pay the ask price of $10.02, which means you’d pay $1,002 for 100 shares instead of the $1,000 you’d have paid at the bid price.
A market maker immediately sells you those shares but only pays the bid price of $10 per share to the investor who’s selling 100 shares of Bluth’s Bananas. The other investor receives $1,000 instead of $1,002, and the market maker keeps the $2 difference.
In the end, the minimal bid-ask spread probably doesn’t make a huge difference to you or the seller. The market maker facilitated an efficient transaction for both of you, so you aren’t worried about $0.02 per share. But you can also see how market makers earn huge amounts of money, given the volume of transactions they handle each trading day.
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Robin Hartill has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon. The Motley Fool has a disclosure policy.
FAQs
Bid and ask reflect investor willingness to buy and sell, creating spreads. Highly liquid markets have minimal spreads; thinly traded ones show significant gaps. Market makers profit by buying at bid, selling at ask, accumulating earnings.
Do I buy at bid or ask? ›
The term "bid" refers to the highest price a buyer will pay to buy a specified number of shares of a stock at any given time. The term "ask" refers to the lowest price at which a seller will sell the stock.
What is the best bid and best ask? ›
Bid prices refer to the highest price that traders are willing to pay for a security. The ask price, on the other hand, refers to the lowest price that the owners of that security are willing to sell it for.
What makes a stock go up bid or ask? ›
In the stock market, the bid price represents the highest price that a buyer is willing to pay for a stock. The ask price is the lowest price that a seller will accept. The difference between the bid and ask prices is called the spread. The higher the spread, the lower the liquidity.
Do you short a stock on the bid or ask? ›
Normally, you can short the stock just like selling it on the bid. However, some stocks may have the uptick rule in place. This means shorts can only be executed on the inside ask price.
What happens if bid price is higher than ask price? ›
When the bid volume is higher than the ask volume, the selling is stronger, and the price is more likely to move down than up. When the ask volume is higher than the bid volume, the buying is stronger, and the price is more likely to move up than down .
How do you know when to bid or ask? ›
Essentially, the bid price demonstrates the demand for an asset, and the ask price represents the supply of said asset. Market makers are those that purchase at the current bid price and sell at the current ask price. Market makers are typically deployed by brokerages to buy and sell securities at specific prices.
What is an example of bid and ask? ›
For example, if a security received a bid of $10 and an ask of $11, an investor would expect to lose $1 or 9% of their investment if they bought at the asking price of $11 and then immediately changed their mind and sold at the bid price of $10.
What is the bid and ask price for dummies? ›
Key Takeaways. When viewing an option chain, the bid is the highest price an investor is willing to pay, and the ask is the best price at which an investor is willing to sell. The bid size and ask size is an aggregate number of option contracts available at those prices.
How to read bid and ask? ›
The bid price represents the highest price a buyer is willing to pay for the security, while the ask price represents the lowest price a seller is willing to accept. In the stock market, a buyer will pay the ask price and a seller will receive the bid price because that's where supply meets demand.
I find the easiest way to think of the Bid and Ask Prices are as follows: The Bid is the price that buyers are willing to pay for a stock. The Ask is the price that sellers are willing to sell a stock for.
Why are the bid and ask so far apart? ›
The size of the bid-ask spread from one asset to another differs mainly because of the difference in liquidity of each asset. The bid-ask spread is the de facto measure of market liquidity. Certain markets are more liquid than others, and that should be reflected in their lower spreads.
How do you know when a stock price will increase? ›
Stock prices change everyday by market forces. By this we mean that share prices change because of supply and demand. If more people want to buy a stock (demand) than sell it (supply), then the price moves up.
Do you buy at the bid or ask price? ›
The bid is the highest price buyers are willing to pay for a financial security, such as a stock, at a given point in time. The ask is the price at which the investor is willing to sell the security.
Do you sell puts at bid or ask? ›
Bid: This is approximately what you'll receive in option premiums per share up front if you sell the put. A market maker agrees to pay you this amount to buy the option from you. Ask: This is what an option buyer will pay the market maker to get that option from him.
Who pays when you short a stock? ›
The short seller borrows those shares from an existing long and pays interest to the lender. This process is often facilitated behind the scenes by a broker. If a small amount of shares are available for shorting, then the interest costs to sell short will be higher.
Do you buy a call at the bid or ask? ›
When buying and selling options contracts, your order is more likely to get filled when it's at the ask price (if you're buying) or the bid price (if you're selling).
Do I sell at bid or offer price? ›
A 'Bid' is the maximum price that a buyer is willing to pay to purchase shares in a stock. The 'Offer' price, sometimes called the 'Ask' price, is the price at which the seller is offering to sell their shares. During trading hours, when the bid price 'meets' the offer price, a trade is executed.
Should I buy stocks at market or limit? ›
Market orders are best used for buying or selling large-cap stocks, futures, or ETFs. A limit order is preferable if buying or selling a thinly traded or highly volatile asset. The market order is the most common transaction type made in the stock markets.
Who makes difference between bid and ask? ›
How are bid and ask prices set? The bid price and ask price is defined by the market, as opposed to any specific individual or organisation. Effectively, it is the market forces of supply and demand.
