When trading stocks, it's vital to understand the terminology and expectations involved to make the most money possible. "Bid" and "ask" are two of the most common industry terms investors should know, particularly for those who plan to aggressively trade their stock holdings. Learn about bid, ask, bid-ask spread, and other important trading terms to improve your wealth management skills and understanding.
What Is Bid vs. Ask?
When purchasing or selling stocks, investors and stockbrokers reference bid and ask prices. A bid is the maximum amount of money a buyer, also known as an investor, will pay for a stock share. An ask is the minimum amount of money the seller, also known as the market maker, will accept for the stock share. Rarely, if ever, are the bid and ask prices the same. Most often, the ask is higher than the bid. Industry experts refer to the difference in price between the ask and the bid as the spread, or the bid-ask spread.
How It Works
Often, investors will enlist the help of stockbrokers or other financial advisors to help manage stock trading, particularly for complicated exchanges like options trades. Industry experts help individual investors determine what a fair ask and bid price for certain stocks would be to ensure their clients make effective trades. The bid-ask spread often helps to pay for any fees or stockbroker commissions on large trades.
The bid-ask spread can vary dramatically from one stock to another. Popular stocks that investors trade regularly often have a small spread, while less popular stocks can have a much larger spread. Those small spread stocks are known as high-liquidity stocks, while those that trade less frequently are known as low-liquidity stocks.
Bid-ask spread only exists for individual stock shares. Mutual funds that include stocks are exempt from the volatility of the bid-ask spread since its prices are set once a day. Investors pay the same to buy or sell shares of a mutual fund.
Example of Bid vs. Ask Orders
Consider this example. Jackson Corp. is selling some of its shares in Glass Inc. for $10.50 a share. Meanwhile, Harbor Site is purchasing shares in Glass Inc. for $10 a share. The bid-ask spread is $0.50 for Glass Inc. stock. Understanding the bid-ask spread helps investors know what fair prices are for buying or selling stock in that company.
Keep these tips in mind when buying or selling securities:
- Know how much you're willing to pay or how little you're willing to accept before buying or selling stock. This way, you have a hard stop in both directions to keep you from losing money in high-pressure moments.
- Rely on data rather than emotions when buying or selling securities or any stocks.
- Perform research on the company before buying or selling stocks to ensure you have enough information to make a decision.
Trading stocks is a great way to amass long term wealth. To make the most of your investments, take time to understand industry terms like bid, ask, and bid-ask spread to ensure you're investing wisely.