Having an understanding of how stock markets work, and how pricing works is an important element to getting started. The bid and ask prices you will see on trading platforms or on charts are one of those pricing elements, and there are some lessons to learn from the spread between the two and the liquidity of the stock you are looking at.
It is close to impossible to successfully trade stocks or anything else on the stock market without understanding your tools, and the pricing. Fundamentally, you’ll need to get to grips with the bid-ask rates or price. To that end, we will look at:
The Bid, Ask and Last Price – How They Fit Into Stock Quotes
On most online stock quotes, what you’ll see is the bid, ask and last prices of a stock. When it comes to news sources, such as TV or a newspaper, you’ll usually only see the last price, or the price the stock was trading at by the time the stock exchange closed.
It is important to note that bid, ask and last prices cumulatively tell you a lot about a stock, such as its spread. The relationship between the bid and ask prices for a stock at any point in trading time is the spread – the difference between the two prices. The stock price spread is also called the the bid-ask spread or bid-offer spread.
The Relationship Between The Bid Price, Ask Price, Spread And Stock Liquidity
The bid and ask price is also known as bid and offer, or a stock’s bid-ask rate. It refers to a price quotation on either side of the stock’s buying and selling power spectrum. As such, it indicates the best price at which a security, such as a stock, can be sold and purchased at any given point in time. It ties together the willing buyer, willing seller concept as far as securities go:
- The bid price is the highest price that a buyer is willing to pay for a security.
- The ask price, on the other hand, is the minimum price that a seller will settle for in order to go ahead with the sale.
After the buyer and seller reach price agreement, the trade is concluded.
The spread is the difference between the bid and ask prices. So, what does this have to do with liquidity?
- The spread is a key factor in determining the liquidity of an asset.
- The smaller or tighter the spread, the better the liquidity in general.
The spread is often represented as a percentage. As an example, let’s say a a stock that is trading at £11.95 / £12. In other words, the bid price is £11.95 and the offer price is £12. Therefore, the bid-ask spread is 5p. Expressed as a percentage, the spread is £0.05 / £12 or 0.41%, rounded off to 0.42%/
A Closer Look At The Bid Price Of A Stock
As noted, the bid price shows the maximum price a potential purchaser is ready to fork out on a stock at any given moment in time. (There is no difference between a stock and a share; the terms are used interchangeably). The critical point is that this bid price will change as investors and traders change their position on a stock due to market sentiment changing, sometimes by the minute, as new information about a stock emerges.
Remember that everyone is reading stock charts and analysing trends as they are bidding. This influences what they are prepared to bid. In general, the frequently traded stocks of the big companies have bid prices that are constantly fluctuating.
When assessing whether to buy or sell a stock, the bid price at that moment is your finite clue to the ‘auction’ price for that stock at that time. So a seller could immediately sell a stock at that price the moment a willing buyer for the shares emerges.
Remember that when reading data from the London Stock Exchange (LSE), these prices are given in pence, not cents as they are on the New York Stock Exchange. There are of course 100 pence in a pound. So, if a bid price is shown as 221.30, that means the bid price is 221.30 pence or about 2.21 pounds.
Understanding The Practicality Of Buying And Selling- How To Get The Best Bid Price
Imagine that you’re at a trading fair in real-life, and have your eye on a vintage item. You have wanted this item for a long time but because you’re a good negotiator, you cannot let emotion get the better of you and simply pay any price for it. Because you’re not just a good negotiator but a highly skilled one, you know you not only won’t pay any price – you want to pay the lowest possible price for it. This is a fair after all, and negotiations are par for course. This is what happens:
- The owner of the vintage item, the seller, sets her price at £50. That is her ask price.
- You indicate that you are willing to pay £43. That is you bid price.
- The spread is fairly tight, incidentally, indicating the item’s ‘liquidity’ or, in this case, that it is probably a good investment.
Much like what happens on the stock market, you now have four options:
- You can choose to to raise your bid.
- You can wait for the seller to drop his ask, while you peruse other items (stock).
- You can find a similar vintage item being sold at a more acceptable ask price to you.
- You can abandon any thoughts of a transaction for a vintage item at the fair altogether.
A Closer Look At The Ask Price Of A Stock
As we have learnt, the ask price shows the lowest price someone is willing to sell their stock for at any given moment in time. Like the bid price, it fluctuates. As a stock owner or trader re-evaluates what they are willing to let their stock go for, the share ask price changes.
Should you want to sell your stock, the ask price at that time represents its current value. It is like putting your house up for sale. You set a property price, or asking price. As negotiations get underway or new information emerges, your asking price may change.
- You find that due to an influx of retail development in your area, there are many prospective buyers jostling for a chance to view your house. Also, the house next door to yours, which is smaller, has now sold at a higher price than your asking price due to this retail news. The market sentiment is good; the market is favourable. Because of these indicators, you raise your asking price.
- However, a couple comes a long and is willing to put in a cash offer. The offer they make – or the bid – is 1,5% lower than your ask price. You decide that a hassle-free cash sale is best, and consequently lower your ask price, so that the transaction can go through.
On the stock market, this ask price is sometimes also called the offer price.
Working Out The Bid-Ask Spread
Because the bid-ask spread simply shows what other people are willing to buy and sell their shares at right now, it doesn’t accurately represent the factual, ‘true value’ of a share or company. Why would a bid-ask spread not reflect true value? This is because true value is likely not to change every five minutes, and be radically different in 6 or 12 months, which is exactly what will happen to the bid-ask spread.
How exactly do you calculate what the spread is? If someone bids in a stock at £8.50 but a seller posts an ask price of £8.53, then the bid ask spread is £0.03. It is the literal difference between the bid price and the asking price.
For a transaction to go through, someone must either lower their ask price or raise their bid price until they meet at the same price, at the same point in time.
So where to experienced traders enter their bid prices? Most of them do not enter enter their trades at the bid and ask prices quoted – unless there is a compelling reason on a share or stock chart to do so, the operative word being ‘compelling’. Instead, the norm is to trades at the mid-price, or the price half-way between the spread.
Other Prices You Should Know About
This is some of the other information you’ll often see on a stock quote. This information too will help shape your trading strategies.
- Previous close: The last price during the previous trading session. From this, you can see if the price is currently higher or lower than it was. You will be able to draw a lot of insight from this and it will certainly influence the trends on your stock or share charts.
- Open: The open price is the dollar or pound value, expressed as cents or pence respectively, at which the first share was traded for the current trading day.
- Volume: This is the number of shares that have been traded during the current session. If you’re an active trader, the higher the volume, the better. Higher volumes mean many buyers and sellers, so the bid-ask spread is usually quite small (about £0.01). It also means you can exit positions without complications because are shares at the bid and ask prices are available. However, these fluctuate all the time so while you can easily get out of a position, you may not necessarily do so at the exact price you want.
- Day’s range: This is the highest and lowest price a trade has vacillated between during the current session.
Bid, Ask and Last Prices Are The Fundamentals Of Stock Trading
Attempting to trade without a solid grasp – and not just a basic notion – of bid, ask and last prices, as well as spreads, are almost certain to result in losses.
You also need to make sure you are getting real-time quotes and not delayed prices. Usually, what is provided on TV is the delayed price, which is the quote data available 15 minutes prior. If you have a trading account, you should be getting real-time quotes.
Most free finance websites and tools will only equip you with delayed prices, although this is changing. You should always trade on real-time quotes only, especially at initial listings and in opening and market closing sessions, that is the first 10 and last 10 trading minutes, as prices are often most volatile during these periods. By following this guide you should be sitting in a much better position to be able to take advantage of this stock trading technique.
