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A Look at Bid vs Ask and How it Impacts Your Trading

By: , dated March 30th, 2015

One of the biggest mistakes that new investors make is looking at the latest stock prices and thinking that they'll be able to enter the market at those levels. In practice, traders use a system called bid vs ask, which lets them control how much they're willing to sell or buy a stock for regardless of wild market fluctuations. It's a way to introduce stability in a market that, at times, is anything but stable.

The Bid Price Explained

The bid price applies to buying stock or any other security. It's the price that buyers are willing to pay in order to secure ownership. Naturally, most investors would think that the bid price should be what the stock is trading for at the present time. Usually the two prices are very close together, but in practice the bid price is nearly always higher than the current ticket price. The reason for that is simple supply and demand -- as more buyers want to acquire a particular stock, they're willing to pay more money in order to do so.

All About Ask Prices

The ask price is the diametric opposite of the bid price. It's the price that sellers are willing to accept in order to sell their stock or other security. As a stock becomes more desirable, typically the ask price raises. It's only natural that sellers would want to be able to secure as much money as possible on an asset that thousands of investors are interested in buying.

Learning About The Spread

The spread is the difference between the price that buyers want to buy for and sellers want to sell for. It can be seen as a measure of demand for any particular stock or security. The spread can also be seen as a representation of the seller's profit margin on any particular transaction. If the stock is hot enough, buyers are willing to accept larger and larger spreads in order to secure that particular asset.

Usually, the spread is represented by two numbers separated by a slash. For instance, you might see a mid-cap spread of $40.05 / $43.00. In order to interpret the spread, remember that the bid price is always found on the left, while the ask price is on the right. In order to make it easy, you might envision the spread like this: $Bid / $Ask.

Market Uncertainty Widens The Spread

Another thing to keep in mind regarding the spread is that it tends to widen when the market is at its most volatile. The spread helps investors retain value when the market is diving, and it also serves as something of a hurdle to making the sort of quick trades which introduce additional stability.

Stock Value (Typically) Narrows The Spread

Large-cap and blue chip stocks typically have the smallest difference in bid vs ask, at least when represented as a percentage of total value. The reason for this is obvious with a little thought: When stocks are very expensive, the same 3% goes a lot further with a blue chip than a micro-cap. When you're dealing with small-cap stocks, it's not uncommon to see a difference in the bid vs ask of $0.25 or more. In fact, investors who buy penny stocks typically need to make up the difference in bid vs ask with purchases of a much larger volume in order to be able to cover the spread and still make money.

Bid vs Ask Explained

The system isn't perfect, and sometimes it means that you won't be able to enter the market at exactly the prices you want, but if a stock has enough value for you to be interested in acquiring it, the spread -- and the entire bid vs ask process -- is something that you'll need to deal with. Hopefully, after reading this article, you're better equipped to do so.

 

Aaron Phillips is a freelance writer and journalist based in Mid-Michigan. He writes the daily market commentary and weekly market roundup for investorguide.com.

Copyrighted 2015. Content published with author's permission.

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