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In the financial markets, an ask price reflects the price that is nearest where investors are willing to sell an asset, such as a stock. It is the other side of an equation that also includes a bid price, which reflects the price that is nearest where investors are willing to purchase a security. The difference between an ask price and a bid price is the spread, and this is most relevant to market specialists that match buyers with sellers on the floor of major stock exchanges and in the secondary markets. The spread represents the fees that market specialists earn on every trade
In the stock market, securities trade in a major exchange or in the secondary markets, also known as the over-the-counter or OTC markets. Prices are established in the OTC markets based on supply and demand. In the secondary markets, electronic dealers display the bid price and ask price on a computer. These firms are considered market makers because they add to trading activity in a particular market.
These dealers generally do not charge trading commissions because they earn fees based on the spread. Unlike the primary markets, the OTC markets do not have a centralized location, such as a stock exchange, where the best bid and ask prices being offered are displayed. Instead, traders and stock brokers rely heavily on communication to determine which dealer is offering to buy or sell a security at the best price.
In the primary markets, there still are multiple bid and ask prices for a security. The difference is that a centralized location, or a major exchange such as the New York Stock Exchange in the United States or the London Stock Exchange in the United Kingdom, aggregates all of the bid and ask prices and displays the best ones. Traders are then able to make the most profitable decisions in a fair manner, based on the highest bid price and the lowest ask price.
The ask price for a security can change at any moment. For instance, if a company announces a warning that it will not be able to meet profit expectations, this can have an impact on a stock in either direction. In this case, the price probably will come under pressure. Even an indirect event, such as signals of a slowdown in the economy or bad news from another company in the same sector as the stock being purchased, can influence the ask price.
I never used to pay much attention to the spread of stocks. I would just put in order to buy or sell without really noticing what the bid or ask price was.
I found out the hard way how important it is to know the difference between the bid and ask price of a stock.
This stock was moving up and down very quickly, with large blocks being bought and sold. I just put in a market order to sell and ended up getting a much lower price than I was expecting.
Another lesson I learned through this experience was to use limit orders instead of market orders, so I would get the stock price that I
Trading stocks can be interesting and fast paced, but it really pays to at least know the basics. Learning about the spread and the bid vs ask price is one of the easiest ways to have a good grasp when getting started.
When I studied to take my Series 7 exam to be a licensed broker, becoming familiar with the bid and ask price in stocks was one of the first things I learned.
This is a pretty simple concept to understand, and both of these prices on listed if you are looking at stock quotes that give any detailed information.
In most stocks that have high volume and high liquidity, you don't see much of a difference between the bid and the ask. The times when you see the biggest spread is in low volume stocks, or when there is some temporary breaking news happening.
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