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When you look up a stock price on a financial news website, you see a single price. But when you look up the stock using your brokerage account, you discover that each stock has two prices -- a bid price and an ask price. The bid and ask prices are an important part of the function of the stock market and how share prices are set.
The Ask Price
The listed ask price lives up to its label. The ask is the lowest firm price at which someone in the market has offered to sell shares. If you enter a market order to buy the stock, your order will be filled at the current ask price. The ask is the cost to buy shares at the current moment in the market. On the opposite side of the ask is the bid price, which is the highest offer in the market to buy shares.
When you look up the price quote for any stock, there will be a bid price and an ask price, with the bid price the lower of the two. The difference between the two prices is the bid/ask spread. The spread can range from a cent or two on actively traded stocks to 50 cents or more for thinly traded over-the-counter stocks. If you want to see a dramatic representation of the spread, look up the bid and ask prices of your favorite stock when the markets are closed. The spread widens when the exchanges are closed so no one with a listed order gets surprised by a sudden price move.
Liquidity in the Market
Ask and bid prices are put into the market by investors and traders willing to sell or buy at those prices. Behind the best bid and ask prices will be other orders at higher and lower prices. The ask prices provide liquidity as the stock price moves. Consider a stock with a current ask of $20 and 10,000 shares offered at that price. If the 10,000 shares are snatched up at $20, the next-highest offer, possibly $20.02, becomes the ask price. Ask and bid prices are limit orders in the market that are filled by market orders from other traders and investors.
Effects of Bid/Ask
If you could buy and sell instantaneously, you would pay the ask for the stock and sell at the lower bid price. The spread between the ask and bid price of a stock is an additional cost to investing in or trading stocks. The spread cost can be more of a factor than broker commissions on larger orders. Consider a purchase of 1,000 shares of a stock with a 5-cent bid/ask spread. The stock has to go up by 6 cents, or $60, before the stock is at a profit position, commissions not included.
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