Bid & Ask

As you learn to trade stocks and options, it will be important to understand what the bid and ask prices are.  

The Stock Market is much like an auction. The market acts to join sellers with buyers.  Sellers are asking for a particular price and buyers are willing to pay a particular price.

When a buyer steps up by placing an order, a bid has been made. The price that the seller is holding out for is the asking price. When these two prices are the same, a sale is made.  

Think of buying a home.  The seller asks for a certain price.  A buyer  places their bid.  If the buyer wants to complete the sale quickly, they will offer, or bid, at the asking price.  Or, if the buyer wants to negotiate a better price, they will make a lower bid.  On the other side, the Seller may either hold out for a higher price, or agree to a lower price when they are anxious to complete the sale.  A sale does not occur unless the bid and ask come together.

In your broker account, when you pull up a price quote on a stock, it should look something like this.  

 First, let’s quickly review what this bar tells us.  In this example using OptionsXpress, the stock is AAPL.  The last time that a sale occurred on AAPL, the price was $183.84.  The total change in stock price for the current day is .02.  The current bid price is $183.84.  The current ask price is $183.86.  Next, VOL indicates the total number of shares that have been bought or sold during the day indicating the level of activity for AAPL.  Below the stock, you can see quotes for the Down Jones, Nasdaq, and S&P. 

If you were ready to buy shares of AAPL, what bid price would you use?  The simple answer is $183.85.  This splits the bid and ask prices.

Let’s look at the option chain for GOOG.  This screen is from BigCharts.  You will see columns for the bid  and ask prices.  Generally, when purchasing options, we will choose the option at the money.   (click on the image for a larger view)

Let’s scroll down to the at-the-money calls for GOOG.

The current bid for the at-the-money option is $34.80.  The current ask price is $34.90.  Dr. Cooper generally recommends that we split the bid and ask, and place our order somewhere in the middle.  In this example, we may enter our bid using a limit order of $34.85. 

For more help with the bid and ask prices, and how to determine what bid price you will enter, you can ask questions in the War Room and live Chat Room of OnlineOption.com.  You may also want to consider the Paper Trading and Getting Started webinar classes.

To view one of these recorded classes, Click Here.  Each 1-hour class is $59.