When you enter an order to buy or sell a stock, you see the bid and ask for a stock and some other numbers. What are the bid and ask, and what do those numbers mean? One, the bid, is what you need to know when you are selling a stock. The other, the ask (or offer) is what you need to know when youre buying. But you also need to know those other numbers too. Heres how it works:
If an investor looks at a computer screen for a quote on the stock of XYZ, it might look something like this:
Last: 20.01 Bid: 20 Ask: 20.25 Bid Size: 1200 Ask Size: 500
The translation: the stock of XYZ is being bid at $20 a share and offered at $20.25 per share. There are 1200 shares bid for and 500 shares offered [note: some brokers may display these size numbers in hundreds, so 12 and 5 in the above example instead of 1200 and 500]. If you are looking to sell stock, now you know there is a firm willing to pay (thats the bid side of the market) $20 for your stock, and that you could sell at least 1200 shares of stock at that price. Those are the two parts of the bid side of a market on a stock: the price and the quantity of shares at that price.
If you are looking tobuyXYZ stock, you would have to pay $20.25 and could buy at least 500 shares of stock. Again, there are two parts to the ask side of the market: the price at which you can buy stock and the amount of stock you can buy.
When you look at a quote for a stock, its only good for the time at which you check it. The bid and ask and the sizes for each side changeconstantly. If you were to check back in two minutes and youd like to sell your XYZ at $20, the $20 bid may not be there because the stock may have moved up or down in that time frame. So each time you trade, youll need to check the bid and ask to see where your particular stock is trading.
Whenever you enter an online trade, a live quote will be shown so youll know where the stock is trading and what to expect if you buy or sell your stock. However, be aware that the stock can move very fast and that you may not get the price shown on your screen. Thats because by the time your order is sent to the floor to be executed, the bid and ask may have changed because there was an order that came in ahead of yours and wiped out the bid or offer. Then the stock moves to a new level and the bid and ask will be different from what your screen showed when you entered the order. This doesnt happen very often, but it does happen. And when investors look at the bid and the ask and then enter what is known as a market order (meaning they will buy or sell stock at the market, no matter where the market for the stock is), and then see their execution price is different from the stock prices they saw, they have to realize that stocks can be very dynamic, sometimes changing just as their orders are entered.
Another bit of jargon: the wordsaskandofferare the same thing. This is the side of the market where investors can buy stock. So when you hear: Wheres the stock offered? Or whats the ask on the stock? Theyre both asking the same thing.
The size of the market can help you decide on the timing of your purchase or the price. For example, if good old XYZ is trading at $20, and the bid size for the stock is 20,000 shares but only 500 for sale, then if youre looking to buy the stock, you might want to get your order in quickly because if the buyers of the 20,000 shares get excited and start to buy all the stock around, no matter what the price, it will push up the price. On the other side of the trade, if you are a seller, you may want to wait a little while because that kind of size to buy suggests that maybe the price will be moving up if the buyers dont have patience and want that XYZ stockNOW.
Of course, the buyers may not move from the $20 price, or may find another stock that is more attractive and buy that one instead. So you cant know with certainty what will happen with the stocks price. But then, except for death and taxes, certainty just isnt part of life or investing.
Another bit of jargon: alimit orderis another way to make a trade, which differs from amarket order. While a market order says you will trade the stock no matter what the bid/ask is, a limit order lets you specify the exact price you are willing to pay/accept. Suppose you are looking to buy 1000 shares of XYZ, youve looked up a quote on XYZ and see that the ask size is just 100 shares asking $20.25. If you put in your market order for 1000 shares youll gobble up those 100 at $20.25, but then also the next seller on the ask, and the next maybe the next if youre not filled yet, all the way through to a fill for your full 1000 share order… You may be OK with this if for example you would like to be a buyer anywhere below $20.30, and your broker quote shows you the wholeorder bookshowing the next ask is 100 is $20.26, and 800 above that at $20.27. But suppose the next ask was, for example, 100 shares at $20.31, then 500 at $20.50, then 300 at $21.85. Your market order could result in your purchasing all of those shares. With alimit order, by comparison, you could specify your $20.30 price limit, and then wait, hoping that your order eventually gets filled. It may not, if the stock moves up, leaving you with apartial fill. Which segways into one last bit of jargon: an order can be placed as agood til canceledorder, which leaves it open until either it fills, you cancel it, or it expires (different brokers may have different maximum time limits). You can also place a good til canceled order with your own expiration date (up to the brokers maximum).
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