Why does a stock have a bid, an ask and a price?
A stock has one price, right? Guess first, then see the bid, the ask and the last trade with real numbers, and what a limit order does.
- 1A stock has two live prices: the bid and the ask6 min
- 2The price on screen is the last trade, not a quote5 min
- 3A limit order is a ceiling, and orders trade at the best price6 min
- 4Someone earns the gap, for being there5 min
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The ideas people most often get wrong on the way, in their own words. Each step starts from one of them.
The short answerRather read it than work it out?Show it (it gives the steps away)
The bid is the most any buyer is offering, and the ask is the least any seller will take. They never equal each other, or the orders would trade. You buy at the ask and sell at the bid, so buying 100 shares at 100.10 and selling at 99.90 straight away loses 20. The price shown on screen is just the last trade.
The big number in the app is usually the price of the most recent trade. It might have been at the ask or at the bid. It isn't something you can take. The prices you can deal at are the current bid and ask, and a market order pays the ask, plus more if it needs to reach further up the book.
Orders meet in a book of waiting buys and sells. A new buy trades with the lowest asks first. A limit buy at 101 against an ask of 100.10 fills at 100.10, so 50 shares cost 5,005, not 5,050. The limit only matters when the market runs above it: then the order waits.
Market makers post both a bid and an ask all day, so there is always someone to trade with. They earn the spread on each round trip, and they pay for it in risk: shares they hold can fall on bad news. Where many compete, the spread is a cent. Where few do, it is wide, so a thinly traded stock costs far more to trade.
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