When trading you will hear about the bid and ask price. So what is it? And how do you use it? And that’s what we’re going to talk about in today’s video. So what is the bid and ask price? Very easy. The bid is the price that buyers are willing to pay for a stock and the ask is the price that sellers are willing to sell a stock for. Here’s an example. You see in this example, buyers are willing to pay $259.06 for Apple, but sellers want at least $259.10 per share. So let’s think about it for a moment. Some people think that the exchange is determining the price of a stock, and that’s not the case. The price of a stock is determined by the price that buyers and sellers are willing to trade at. Let me give you an example. When you walk into an art gallery and you see a painting with a price tag of $30,000, then this is the ask price of the seller of the painting. It’s not the fair price, it’s simply a price that the seller would like to get when selling the painting. So he’s asking for it. And you as a potential buyer could now offer or bid $20,000. And the seller now has two choices. He can accept your bid or he can lower his asking price and see if you’re willing to buy the painting at a lower price. As you can see, the final trade price is determined by the price that the buyer and seller agree on. The same with stocks, the last price of a stock is the price that buyers and sellers agreed on. That’s the price a trade was made. However, you cannot buy a stock at the last price traded, if you want to buy a stock you have to find a seller who is willing to sell it to you. Is this making sense thus far? Because if it does, then click the “Like” button and subscribe to this channel. And hit the little bell because this way you get a notification whenever I release a new video. So you might wonder why is the bid and ask price so different? Sometimes you will see that the bid and ask price is very different. Here’s an example. In this example, buyers are willing to pay $20.80 for this stock, but sellers want at least $21.50. The difference between the bid and the ask price is called “the spread.” And in this example, the spread is 60 cents. In the previous example with the Apple stock the bid/ask spread was only 4 cents. So why is the bid and ask price for this stock so different? A large bid and ask spread is usually caused by one of the following two conditions. Either you’re looking at a stock with low trading volume, so there’s simply not many buyers and sellers, or you’re looking at the stock during after hours which means outside regular trading hours. And if that’s the case, then you will see that the bid/ask spread tightens immediately after the open. In the example above, I took the screenshot five minutes before the open, and shortly after the open the bid/ask spread was much smaller. Take a look at this. So as you can see the bid/ask spread tightened from $0.60 to $0.04. So the next question is what happens when the bid and ask are far apart? Well, at some point, either the buyers or the sellers need to make another offer. Either the buyers need to raise their bid or the sellers have to lower their ask. Otherwise, no trade would take place. It’s like in our gallery example from earlier. If the seller keeps insisting on a price of $30,000 and not a cent below, and the buyer is only willing or able to pay $20,000 and not a cent more for the painting, then the painting won’t be sold. And the same in the markets, only if buyers and sellers agree on a price a trade can take place. Is this helpful thus far? If it is, click the “Like” button and subscribe to my channel and make sure to hit the little bell because this way you get notified whenever I release a new video. So, now the question is what is a normal bid/ask spread? You see, when trading stocks a normal bid/ask spread is usually anywhere between $0.01-$0.04. Whenever you see a larger bid/ask spread, you’re either looking at a stock that’s not very liquid or you’re looking at a stock outside of regular trading hours. Now for options a normal bid/ask spread is $0.05-$0.20 for two reasons. First of all, most options are trading in $0.05 increment. So for example, $1.10, $1.15, $1.20, you get the
idea. And the second reason is options are not as liquid as stocks. Only a fraction of traders are trading options and therefore there are just fewer buyers and sellers. So should you buy at the bid or the ask price? Let’s review. The bid is the price that buyers are willing to pay for a stock and it’s usually lower than the ask. It would be great if you could buy at the bid price, but most of the time that’s not possible. You can either buy a stock at the ask price or we can make an offer that’s between the current bid and the ask and see if one of the sellers is willing to take the trade. Here’s an example. Buyers are willing to pay a maximum of $8.30 for their stock, but sellers want $8.73. If you wanted to buy the stock, you could offer $8.40 and see if a seller is willing to sell you the stock at this price. See, often traders split the difference and offer a price in the middle and this also known as the mid price. Now, this brings us to the next question. Can you buy a stock for less than the asking price? Absolutely. When you step out of the pool of buyers and offer a higher price than everybody else, you might find a seller who is willing to take your bid. In the example above, the bid is $8.30 and the ask is $8.73. So the mid price would be $8.52. So if you would raise your bid to $8.50 or maybe $8.55, which is very close to the mid price, it is very likely that there is a seller who is willing to take your bid. Now, it is very important that you know what order to use if you try to bait sellers, and fortunately, I have a video for you that explains the difference between a stop order and a limit order and I’ll link to it in the description below. So in a nutshell, if you want to buy a stock for less than the ask price, you need to use a limit order. Just watch the video to learn more about it. All right, now you know what the bid and ask price is and how to use it in your trading. If you found this helpful, click the “Like” button and subscribe to my channel and always make sure to hit the little bell because this way you get a notification whenever I release a new video.