Bid and Ask are two crucial concepts in getting the best possible value from your trades. Otherwise, you are at the mercy of your brokerage if you only select the market price to buy or sell trade at.
In every stock transaction, there is a buyer and a seller on each side of the trade. As a seller, you want to get the best price possible when you sell your shares. As a buyer, you also want to set the price at a profitable rate. Only when these two prices are agreed upon, will a stock trade take place. Just think of a stock trade as one big compromise where both sides of the trade are happy with the price of the transaction!
So what is an Ask in stocks? The Ask price is the lowest possible price that a seller is willing to sell their shares at.
Bid vs Ask. What is the Difference?
We already talked about what the Ask price is, and you can probably guess what the Bid is. The Bid is the highest price that a buyer is willing to pay for a stock.
The Bid and the Ask are two sides of the same coin. Both of these prices can be set directly in your brokerage account before executing a trade. They work together to carry out a trade, but there are plenty of times when the Bid and the Ask do not agree with each other. In the case of a disagreement between the Bid and the Ask prices, the trade will not go through!
Bid vs Ask Example: The Painting
Let’s look at an example of how the Bid and the Ask prices work.
There is an art gallery that sells pieces of art by local artists. Great! Now if you walk in there one day and want to buy one of the pieces.
If the artist wants $10,000 for the painting, then that’s their ASK price.
If you are willing to BID $10,000 for it, then great! The transaction will take place. The painting is yours, and the artist walks away with the money! But if you are willing to BID only up to $8,000, then you aren’t going to get that painting.
Unless of course, the artist changes the price they ASK for. If they are willing to take your $8,000 BID for the painting, the ASK price now matches your BID, and the painting is yours.
Make sense? It is an easy way to think about the BID and ASK in a stock trade. Just think of the painting as the share(s) of a stock!
What is a Spread?
The Spread is the difference between the BID price and the ASK price. It is the amount by which the ASK price exceeds the BID. Naturally, the ASK price is greater than or equal to the BID when a transaction takes place.
What is the significance of the Spread? A high spread usually means high volatility in the market or low trading volume, usually in pre-market or post-market trading. Routine intraday trading and trading of high-volume stocks typically have a low spread.
Usually, the spread is just a difference of a few cents, which is why for the most part, our trades have no problems going through. The Spread is important especially for high-volume traders and for traders who buy and sell more frequently.
Higher spreads require the trader to be making higher profits to account for the cost of making the transaction. A low spread is encouraging for traders to buy/sell more frequently, considering that the cost of each transaction will be lower.
Why Are Bid and Ask Prices Different?
The difference in the Bid and Ask prices is really what drives the market. Market makers and brokerages make profits on the difference between the Bid and the Ask prices. A Market Maker will buy shares at the Bid price and then sell them at the Ask price. Even if the spread is just a few cents, doing this over millions of shares brings in a nice profit.
Summary: What is an Ask, a Bid and Spread in Stocks?
In this article, we talked about the Ask, the Bid, and the Spread.
The Ask in stocks is the lowest price that the seller is willing to sell their shares at. The Bid in stocks is the highest price that the buyer is willing to pay for the same shares. The difference between the two is Spread.
The Bid and the Ask prices are a critical part of creating an efficient market for equities, because if the Ask price isn’t met by the buyer, then the trade will not go through.