When we first started looking at stocks, we saw 2 different prices and they were the BID and ASK price. Instantly we were wondering what the heck is meant. Did this mean I could pick what price? We quickly learned this was not the case, and there were reasons for the different prices.
Understanding the stock SPREAD
The BID and ASK price are a measure of supply and demand. Now in stock trading there is usually a buyer and a seller. You are a buyer if you are looking to buy shares and you are a seller if your trying to sell your shares! Now the important thing to remember is that the ASK-BID gives you something called the SPREAD. The lower the SPREAD the more the demand in the market place. If you see a stock with a very large SPREAD, your best guess is that there is not a high demand for the stock. Ideally day traders like to find stocks with a low SPREAD, because there is now demand in the market place. Below you can see the figure where it lists the BID and ASK price. You can see the SPREAD is .03 which is low and appealing.
Now What is the BID and what is the ASK?
BID price - What the investors are willing to pay for the stock
ASK price - What sellers are trying to sell their shares for.
Now when a traders enters an order to buy at the "market", this means they are willing to pay that ask price which is higher than the bid. This way they can get in instantly and not wait for the price to drop like the traders at the bid are doing. Traders can place an order to buy at the bid price, but it becomes a waiting game. The price can either drop and fill your order at that lower price, or the stock price/ask can continue to go up which gives you a less chance of being filled at the bid.
*The BID and ASK price will always be changing if there is a high amount of supply and demand*
Trading stocks with a high spread
Now some traders will come across a stock that have a large spread (difference between ask and bid). This makes it difficult because now you may have to pay a much higher price for the stock to get in. For Example:
Say a stock has a bid of $1.20 and ask of $2.00. Thats a very large spread. If a trader buys the stock for $2.00, now it may become harder to sell since the spread is so big. A lot of new traders will get themselves stuck in the hole. There is a large spread meaning there isn't that much supply and demand.
Full Example
Let's assume you want to purchase 1,000 shares of XYZ stock at $2, and sellers wants to sell 1,000 shares at $2.20. The spread is the difference between the asking price of $2.20 and the bid price (your price) $2, or 20 cents. An individual investor looking at this spread would then know that if he wants to sell 1,000 shares, he could do so at $2 by selling to you. Conversely, the same investor would know that he could purchase 1,000 shares from the seller at $2.20.
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