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Explain Bid and Ask prices to me

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  • #1

    Explain Bid and Ask prices to me

    Can someone explain this to me? The stock quotes list a Bid price and an Ask price. What exactly do those prices mean? One stock I own, and just bought more of (FXCB), trades with a wide spread between Bid and Ask. Right now, Bid is $8.09 and Ask is $9.47. Because of that spread, Scottrade actually wouldn't accept online orders. I had to call and place the order with a broker (though they charged the online rate). So what's the deal?

    In contrast, BAC has a Bid of $6.78 and an Ask of $6.79.
    Steve

    * Despite the high cost of living, it remains very popular.
    * Why should I pay for my daughter's education when she already knows everything?
    * There are no shortcuts to anywhere worth going.
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  • #2
    bid is the price at which the buyers are willing to buy at and "ask" is the price a seller's willing to sell his stock at. So if you're buying as market order you'll be paying the ask price. Unless you use limit order.

    Fool.com: Fool FAQ - Bid/Ask Price

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    • #3
      So using my example.

      Bid is $8.09.
      Ask is $9.47.

      I put in a market order to buy 100 shares.
      I will pay $9.47 for them.

      I put in a limit order to buy 100 shares at $9.00.
      I wouldn't get anything unless the Ask price drops to $9.00.

      Is that correct?

      Does the wide spread indicate anything particular? Does a Bid that is much lower than the Ask mean that people think the stock is overpriced? Or does it not mean that?
      Steve

      * Despite the high cost of living, it remains very popular.
      * Why should I pay for my daughter's education when she already knows everything?
      * There are no shortcuts to anywhere worth going.

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      • #4
        A big spread in bid/ask is caused by low trading volume.

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        • #5
          Originally posted by sweeps View Post
          A big spread in bid/ask is caused by low trading volume.
          That's exactly the case with this stock. Total volume today was 13,275 shares and I bought about 2.5% of them.
          Steve

          * Despite the high cost of living, it remains very popular.
          * Why should I pay for my daughter's education when she already knows everything?
          * There are no shortcuts to anywhere worth going.

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          • #6
            Originally posted by georgealan
            So you made a good deal
            I certainly hope so, though it is much too soon to know since I just bought the shares yesterday.

            The bank went public about 2-1/2 years ago at $10. It climbed up to about $15 before settling in around $12 until the market tanked. The bank has a very good balance sheet and once the market settles down, it should get back up into the teens. I thought $9 was a fair price to hold onto it for a while. If it is $12 a year from now, I'd be happy with that.
            Steve

            * Despite the high cost of living, it remains very popular.
            * Why should I pay for my daughter's education when she already knows everything?
            * There are no shortcuts to anywhere worth going.

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            • #7
              Did the Scottrade rep explain exactly why such a trade couldn't be done online, and you had to talk to a broker?

              Please don't quote me on this but....

              Ideally, the bid-ask spread is incredibly small. So, there is almost no problems in terms of what price people trade at.

              But when the bid-ask spread gets too big, it's causes a discrepancy with what sellers and buyers are willing to trade their securities, and what is listed as the current market price, which is really the price that the securities last traded at. In other words, some could get upset for not realizing that they are buying at a higher price than the market price, or selling lower.

              Perhaps that's why Scottrade won't allow online market orders when the bid-ask spread gets to a certain size. The broker might then enter a limit order instead. For that matter, perhaps that's also why only online limit orders are allowed, because the transaction does not take place until your bid price finally matches up to the ask price.

              But yes, trades are really made through the bid/ask price, not the market price. Oh, let me also add that the bid/ask is only the highest and the lowest price traders are willing to buy and sell. Most of the bid/ask prices are between the two extremes, and it's up to the market makers to match up these trades.
              Last edited by Broken Arrow; 04-01-2009, 07:11 AM.

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              • #8
                Originally posted by Broken Arrow View Post
                Did the Scottrade rep explain exactly why such a trade couldn't be done online, and you had to talk to a broker?
                He just said it was because of the wide spread between bid and ask. I didn't ask for more details than that. He took the order, charged me the online commission and I was all set. It was a limit order I was trying to place online. They wouldn't accept any trades for the stock online, market or limit.
                Steve

                * Despite the high cost of living, it remains very popular.
                * Why should I pay for my daughter's education when she already knows everything?
                * There are no shortcuts to anywhere worth going.

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                • #9
                  Wow, not even limit? I'm surprised. Thanks for the heads-up.

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                  • #10
                    Originally posted by sweeps View Post
                    A big spread in bid/ask is caused by low trading volume.
                    This also why you'll see some stocks surge big either way during after-hour trading.
                    The easiest thing of all is to deceive one's self; for what a man wishes, he generally believes to be true.
                    - Demosthenes

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                    • #11
                      I'm surprised they didn't allow you to place a limit order. Is this stock traded on a regular market like NYSE or NASDAQ or is it on the pink sheets.

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                      • #12
                        Originally posted by grand_canyon View Post
                        I'm surprised they didn't allow you to place a limit order. Is this stock traded on a regular market like NYSE or NASDAQ or is it on the pink sheets.
                        It trades on NASDAQ.
                        Steve

                        * Despite the high cost of living, it remains very popular.
                        * Why should I pay for my daughter's education when she already knows everything?
                        * There are no shortcuts to anywhere worth going.

                        Comment

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