What are the bid and ask prices in the stock market?
When it comes to stock trading, the bid is the highest price a buyer is willing to pay for a share of a stock, while the ask is the lowest price a seller is willing to accept for a share.
Bids represent the demand side of the stock market, while asks represent the supply side. If a stock has more buyers (bids) than sellers (asks), its trading price will rise until supply and demand balance. Similarly, when a stock has more sellers than buyers, its price will fall until demand meets supply.
What is the bid-ask spread and how does it relate to liquidity?
A stock’s bid-ask spread (sometimes just called the spread) is the difference between the bid and ask prices. The smaller the bid-ask spread for a given security, the more liquid the security; The larger the spread, the less liquid it is. In other words, stocks with more total buyers and sellers have smaller spreads and are therefore easier to trade efficiently.
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TheStreet Dictionary Terms
When a trader buys a stock, they pay the ask price – the lowest price the seller will accept at the time. When a trader sells a stock, they only get the bid price. For this reason, if a trader buys a stock with a bid-ask spread of 10 cents and sells it immediately, he will lose 10 cents as a result.
Who benefits from bid-ask spreads? Where does the difference go?
It may seem confusing that a trader should sell a stock at its bid price rather than its ask price—after all, they are the ones selling the stock.
In reality, however, individual traders do not buy from or sell to Other individual traders—invisible intermediaries called market makers—facilitate each trade. They buy shares from traders who want to sell them and sell shares to traders who want them to buy.
These entities exist to provide individual traders with the necessary liquidity to execute buy and sell orders immediately rather than waiting for a match with a trader in the opposite position. At any given time, a market maker has enough shares of a company that it can execute both buys and sells instantly.
In exchange for the service they provide, market makers pocket the bid-ask spread from each transaction. This is why individual traders must buy at the ask price and sell at the bid price.
Ask for a bid and example
Let’s say that a hypothetical company called Acme Adhesives is currently trading at $45 dollars per share. Acme is a popular company with high daily trading volume, so it does not have a large bid-ask spread. The bid price is $44.98, and the ask is $45.02.
A trader wants to buy ten shares, so they pay $450.20 – the asking price multiplied by 10 shares. The market maker who facilitates this transaction will make a profit of $0.40 (the difference between the ask price and the bid price multiplied by 10 shares) as a result of the trade.