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Stocks
Bid, Ask, and Price |
Having three types of prices for the
same stock is a concept hard to grasp for many investors. You should understand what the
bid, ask, and price represent for a normal stock quote and how to differentiate between
the three. You should also know how the spread is calculated and why the market
maker profits from it.
The Bid
If you're selling a stock, you'll receive "the bid" price. This is the price
buyers (market makers) are willing to pay (or bid) for your stock. The actual price is
dependent on the last transaction that occurred and the overall demand for your stock.
Think of selling a home. You have your home (stock) listed with a realtor
(broker). They are trying to sell it to potential buyers (market makers) who are each
bidding a different amount based on the price they're willing to pay.
The Ask
If you're buying a stock, you'll pay "the ask" price. This is the price sellers
are willing to sell their stock for.
Think of buying a home this time. The sellers (market makers) are trying to sell
their home (stock) to you through a realtor (broker). They're "asking" that you
pay a certain amount for the home. You decide if this is the amount you're willing to pay.
The Price
The price represents the dollar amount the stock was bought or sold at during the
last transaction. If the last trade was an order to buy, "the price" is equal to
"the ask" price. For a sell order, the price is equal to "the bid"
price.
The Spread
The difference between the bid price and the ask price of a stock is called the spread.
This is a fee that market makers charge to keep stocks liquid. It's also how market makers
earn their living -- and a reason you end up paying more than just trading costs.
Take a look at the following example.
XYZ Stock: Bid 15 1/2, Ask 15 3/4,
You'll pay the ask of 15 3/4 if you want to buy the stock and you'll receive a bid of
15 1/2 if you want to sell the stock. The spread of XYZ in this case is $0.25 per
share. For a 1000 share trade, the market maker will earn $250 (1000 shares x $0.25) --
not too shabby for one trade.
Spreads occur more often with OTC stocks and bonds than they do with larger blue-chip
companies that trade on the New York Stock Exchange (NYSE). The sheer volume of trading
and number of buyers/sellers on the NYSE make spreads much smaller, even non-existent.
Spreads tend to be smaller for low-priced stocks and wider for stocks that are more
volatile. And actively traded stocks normally have a smaller spread than stocks traded
once every few days.
Stock Calculators:
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• What is my return if I sell now?
• Should I sell before or
after one year?
• What future return makes selling now
worthwhile?
• What selling price provides my desired
return? |
