Would you be surprised to learn that the price you see quoted in the financial news is not the only price available for a stock? Those green and red flashes you see on your screen only show you the last traded price of a stock. The bid and ask prices are what matter when it comes to selling or buying shares. An even more important bit of information for stock traders is the difference between the bid size and ask size, as this can help indicate the direction of the market for a particular stock.
What Are Bid & Ask?
The bid price is the highest price that a buyer is willing to pay for a stock. The ask price is the lowest amount that a seller will accept for a stock. The difference between these two prices is known as the spread. The spread is what provides a profit for market makers and specialists. If IBM stock is quoted at a bid price of $152 and an ask price of $152.02, for example, the specialist can make $0.02 per share sold.
How Market Trading Works
Bid and ask prices in the marketplace represent the National Best Bid Offer, or NBBO. This requirement was imposed on all electronic and smaller exchanges by the U.S. Securities and Exchange Commision in 2007 to ensure that investors all saw the same best bid and ask prices.
If you enter a "market" order for a stock, it is executed at the current market price. If you're a seller, this means you are "hitting the bid," or selling your stock for the current bid price. If you're a buyer, you'll pay the current ask price. To provide liquidity and maintain orderly markets, specialists are required to buy and sell stock from market orders at the current bid and ask prices. In exchange, they get to keep the amount of the spread.
Bid & Ask Size
Each bid and ask price has a size attached to it. The size indicates the number of shares, in hundreds, that are offered at the specified price. In the IBM example, the size might be $152 x 800 bid, $152.02 x 900 ask. This means there are 80,000 shares waiting to buy the stock at $152, and that 90,000 shares are available for sale at $152.02.
The bid and ask size are visible on what's known as a "Level 1" screen. Serious traders prefer access to a "Level 2" screen, which shows all the shares available at various bid and ask prices, not just the "best" prices. For example, a Level 2 screen might show bid prices of $152 x 800, $151.99 x 700 and $151.88 x 950.
Importance of Bid/Ask Size
In stable markets, the bid and ask size is often comparable. However, if an order book is stacked in one direction or the other, it can be a sign that the stock itself is headed a particular way. For example, if IBM was trading at $152 x 1 bid, $152.03 x 10,000 ask, there are 1,000,000 shares offered for sale and only 100 shares willing to buy. The path of least resistance for the stock price is lower, because with a simple 100-share sale the next bid might be $151.95, for example. Meanwhile, the stock price won't move up until buyers purchase all 1,000,000 shares for sale at $152.03.
Things are not always this simple, however. In some cases, large block sellers will wait until enough shares accumulate at a certain bid price so that they can execute their trade. A seller of 80,000 shares of IBM, for example, won't want to sell when only 100 shares are offered at the bid price because their large block could easily drive the stock price down, costing them money on their remaining shares. If a large block of buyers shows up at the bid price, they can execute their entire trade without taking down the stock.