Bid Price vs. Ask Price Explained
Bid Price vs Ask Price
Bid Price– The bid price is the price someone out there is willing to pay for the security or stock, such as a broker, dealer, market maker, or trader. This is also the price at which you could sell your stock if you decided to. Often the bid will stipulate both the price at which the buyer is willing to purchase the security and the quantity (of shares) needed to be purchased.
Ask Price – The asking price is the amount at which a broker, dealer, market maker, or trader is willing to accept for a security. In other words, it’s the price at which you can purchase the stock, or the amount at which others would have to pay to get the stock. Along with the price, the ask quote will generally also stipulate the amount of the security (or shares) willing to be sold at that price.
Bid vs. Ask Example:
If you’ve ever traded-in a used car at car dealership, you understand the difference between the “bid” and “ask” price of a stock. The “bid” price is the price the dealer is willing to pay to buy from you, be it your used car trade-in, or a stock you’re selling.
The same dealer will then re-sell your old car at a higher “asking” price than what they paid you; what they are looking to get. They make a profit based on the difference, or spread, between what they paid you (bid) and what they sold your old car for (ask).
The same goes for stocks. If you’re looking to buy a stock from the broker, the broker will offer to sell it to you for a higher “ask” price, and if you’re looking to sell a stock, a broker will offer to buy it from you at their “bid” price. The spread between the two prices is the broker’s profit.
If you are confused, just remember this… you always have to purchase the stock at a higher asking price and sell your stock at the lower bid price. The ask price is always a little higher than the bid price. The bid price and the ask price are never the same.
“The Spread” or “Bid-Ask Spread”:
The difference between a bid price (what the buyer is willing to buy the stock at, i.e. the buyer’s bid) and the ask price (what the seller is asking, or what the seller is willing to accept for the stock) is called “the spread” or “the bid-ask spread”. Ask price is higher, bid price is lower.
The difference in price represents the commission that a broker and/or a securities dealer makes in the transaction. Security dealers are sometimes called “market makers” because they help facilitate smooth trading in a stock market. Security dealers keep an inventory of stocks for the purpose of buying and selling. They are sort of a buffer in the market, ensuring that stocks are readily available to buy/sell at anytime. They make their money by building a commission into the pricing of the stocks, which is the bid-ask spread, or “spread.”
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