Bid and ask prices are the key components of a stock quote. When an investor comes to the market to buy or sell a stock, a quote tells him the lowest price at which he can buy (the ask) and the highest price at which he can sell (the bid). The easiest way to understand it is to look at the transaction from the other end: somebody stands ready to bid on your stock if you want to sell, and somebody is asking so much for the stock that you want to buy.
Bid is the highest current price at which you can sell—i.e., the highest price a current buyer is bidding for your stock.
Ask is the lowest price at which you can buy—i.e., the lowest price someone is asking for the stock you want to buy.
A typical quote will therefore look like this: XYZ $24.10 bid, $24.20 ask, meaning that if an investor wants to sell, the highest price he will be offered, or the bid, for his shares is $24.10; if he wants to buy, the lowest price, or the ask, is $24.20.
The bid and ask quotations are often followed by the size of the offer—the number of shares sought or offered at that price. $24.10 bid 3, $24.20 ask 10 means that someone is willing to buy 300 shares at $24.10 and someone else is willing to sell 1,000 shares at $24.20.
Firm vs. Indication of Interest
A quote is firm, or binding, for the first 100 shares—i.e., once quoted, 100 shares must be made available at the quoted price. The rest in an indication of interest and can be changed or withdrawn at any moment. In an active stock that trades millions of shares daily the size of a particular bid or ask can usually be filled (executed) at the quoted price in its entirety in seconds but if a stock is thinly traded, an order to buy 500 shares at the market may be executed at prices progressively higher than the initial quote.
Spread refers to the difference between the bid and the ask. The more a stock trades, the smaller the spread. Smaller, less-liquid issues have higher spreads. Some thinly traded stocks can have spreads as high as a dollar. If an investor were to buy and sell such a stock instantaneously, the spread would constitute the loss he would incur between the two transactions.
- PassTrak Series 7 General Securities Representative License Exam Manual; 2003