As a stock investor you see these two terms (bid and ask price) every time you’re trading. You may think they don’t really mean anything or they don’t really affect your trades, but in reality they’re some important terms to know for your trades.
Not only they’re important to know for your trades, they can have a big effect on your portfolio as well. In this post we’re going to dive into their meanings and also share some more much need information about them.
Let’s get it started.
What do bid and ask prices have to do with the stock market?
Well they’re there for a very specific reason, they may not be in our advantage, but they’re part of the stock market. Many stock investors think stocks have one single share price, but actuality they have two prices. If an investor is looking to buy shares the “bid price” is the price that this investor would be willing to pay.
On the other hand, if an investor is willing to sell his or her shares and you’re buying them, then the ask price is the price you’ll be paying or the one you’re being asked.
In other words, the bid price is what investors want to pay, while the ask price is the price being asked to sell the shares.
It’s basically the same way as if you’re buying something in a flea market. The seller asks for a price, but you want to buy the good for a lower price (bid price).
In the case of stock trading you’ll be most likely to pay the ask price, because it’s easier to get filled in. If your positions aren’t filled you’re not actively trading as you know. Sometimes traders don’t have time to wait, they prefer buying the ask price and move on.
What happens to the difference between the two prices?
The difference between these prices is called bid and ask spread. This bid and ask spread is shared among the specialists who have handled your transaction. Your broker is one of them, some portion of that money is held as commission. However, it’s not the fee that you usually pay to your broker per trade.
As a result, your stock broker is making more money from you than you realize. It’s amazing how they set the fees. Many stock investors have no idea they’re paying this fee, but it’s being paid.
Pay attention to bid and ask spread
Investors usually take note of it before they invest. When the bid and ask spread is too large they assume that not many investors are putting their money into this stock.
You must remember when investors aren’t buying a stock the price will most likely stay stable at one place. You don’t want to acquire position on a stock and then have to sell it with a deficit.
How to prevent paying the asking price?
You can place a limit order when opening a transaction request. This limit order is like you’re telling them you won’t accept your transaction at any price besides your bid price. But keep in mind that your transaction may never get filled up if the price never goes down to your level.
But it’s a good strategy because you’re guaranteed not to pay any more than you would want, and you can even pay at a better price if you get so lucky.
Bid and ask spread can be managed somewhat if you know how to and if you’re patient enough. It’s always a good idea to try to spend as little as you can possibly do on fees in the stock market.
Because you never know what the outcome will be. You don’t want to pay too much on fees and have to suffer a loss from your trade again.
Good luck trading!
Photo credit: MicroCapClub