Bid Price vs. Ask Price

Instructor: Ian Lord

Ian is a real estate investor, MBA, former health professions educator, and Air Force veteran.

In this lesson we explain how the bid price and ask price that appear in stock quotes works as well as the reason for the difference in these two prices.

Bid and Ask Prices

Joan has logged on to her investment brokerage account to see how her stocks are doing. When she clicks on one of her holdings she is confused at first about the way the price is reported.

Instead of seeing one price like she sees in the news reports, she saw two: the bid and the ask. Let's sit down with Joan and explain what these two prices are and how it impacts her when it comes to buying and selling stock.

Definitions

Every stock transaction is a clear example of supply and demand in practice. Let's say Joan wants to sell 100 shares of the XYZ Corporation. On the other end of the country, Bill wants to buy 100 shares of XYZ.

When they each pull up a quote they see the price of XYZ listed as $9.25 / $9.30. The first number is the bid price , the price that the buyer, Bill, must pay to buy shares at this moment. The second number is the ask price, the price that Jane can sell her stocks for.

Market Makers and the Spread

Stocks are bought and sold through the use of broker-dealers, or market makers. This system of brokers operating over exchanges (such as the NASDAQ) is what allows buyers and sellers to conduct transactions nearly instantaneously. The NASDAQ exchange includes over 500 institutions that act as market makers.

When Joan originally bought her shares, her broker acted as a market maker by buying the shares from another market maker.

So what about that difference in price between the bid and ask? This gap is commonly called the bid-ask spread. The difference in price is how market makers generate revenue for their services. The difference between the two prices depends on the type of stock.

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