Wednesday, November 22nd, 2017

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Understanding Stock Prices: Bid, Ask, Spread

Are you confused when you look up a stock’s price and try to figure out all those different numbers? Here’s a primer to help you understand stock quotes.

The current (or last) price is the price of the most recent trade that has been completed for the stock. It’s not necessarily the price you would pay or receive for a share if you placed an order at that moment. During the market day, stock quotes are typically delayed 15 to 20 minutes unless you specifically request a real-time quote. Stock prices change frequently and quickly, as well, so the last price may no longer be very current.

The current day’s high and low prices are usually displayed, too. As you expect, these are the highest and lowest prices at which stocks were bought or sold during that day. The same goes for the 52-week high and low prices.

For Nasdaq-listed stocks, the price quote includes information on the bid and ask prices for the stock. The bid is the highest price any principle brokerage firm (a market maker) is willing to pay for a stock at a particular time, just like at an auction. If you think of an auction, you make a bid on an item that you want to buy.

The ask is the lowest price that any principle brokerage firm (a market maker is willing to accept to sell a stock at that particular time. For example, If you were selling your used car, you would establish your asking price. That’s the price you would ask a potential buyer to meet if he or she wanted to buy your car.

The spread is the difference between the bid and the ask prices of an over-the-counter traded stock.

Why a Stock’s Price Changes

The price of a stock trade essentially depends upon two simple factors: how little the seller will accept and how much the buyer is willing to pay. So what are all those prices you see in the stock tables in the newspaper or on an Internet quote server? These numbers are the prices of the last trades of the prior day or the prices of the most recent trades. You can also find the best price that buyers will pay for a share at the current time, as well as the best price that sellers will accept. If you’re buying, the price you pay for shares may be worse or it might be better than the most recent quoted price – by a little or a lot.

A stock’s price is constantly changing–rising and falling by a few pennies (or even a few dollars). There are many factors that can cause a stock’s price to change, and not all of them are rational. Investors often buy or sell a stock out of fear or some other emotion, and not because it’s the “logical” thing to do. In addition, investors often exhibit a herd-like mentality, basing their own buy or sell decisions on what everyone else is doing.

Sometimes, though, this overreaction can create opportunities for investors who are willing to run against the pack, buying a stock when it has been temporarily depressed or selling when a stock’s price has been elevated for no apparent reason.

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6 Responses to Understanding Stock Prices: Bid, Ask, Spread

  1. Robert says:

    May I suggest that you replace the word “principle” with the word “principal”

  2. vin says:

    In This case Principle is more appropriate.

  3. Chuck says:

    I’m only recently getting interested in investing. I was wondering if there is a market out there where someone can profit off of the bid/ask spread by placing a buy order beating out the next guy by a penny. If fulfilled then placing a sell order undercuting the lowest sell price, and profiting off of the spread. I hear this is called scalping, is this true?

  4. victor says:

    Thanks for this!

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