How Do A Bid And Ask Work In Stock Trading?

Bids And Asks

In the stock trading process, all sales of stocks, bonds, and other investment tools will be subject to a bid and ask.   The bid and ask is where the actual sale price for a stock is decided.  Most people can see the price of a stock printed in the financial section of the newspaper, or more easily these days on real-time stock tickers online.  This price however is not the actual purchase or sale price of a stock, but rather an average.  The stock price or stock value given is the result of bid or ask trading, getting the highest and lowest bids and asks, and averaging the two.  The bid price is also known as the offer price from the buyer in the trading process.   The ask price is what a stock seller sets as the amount they will sell a certain stock for.  These bid and ask trading prices also include the share quantities of the sale.  For example, to get the stock price for a given share, the following bid ask process gives the result:

Seller sets a bid price for Stock A at $2.45 per share for 1,000 shares

Buyer sets an ask price for Stock A at $2.43 per share for 1,000 shares

Assuming that these are the two highest bid and ask amounts, the real-time share value for stock A will be calculated to be at $2.44.

Why Bid Ask Process Exists

The bid and ask exists because shares of stocks and other commodities have assumed, or market value.  Just like a home, car, or near any other product there is a price one wishes to sell for, the ask price, and another amount one is willing to pay, the bid price.  The difference in the stock trading process is that these amounts are not haggled over or negotiated, but rather clearly represented.  In this way stocks can be executed when there is a price match, quantities groups together, and stock sales made rapidly using Electronic Communication Networks.  Most first time investors are a little surprised to learn that the stock they own is not set in it´s value by what the tickers say.  The whole system is based on supply and demand.  If there is no one willing to buy your stock at a given time for a given price, the actual value of it declines.

Related posts:

1. What Is A Bid?
2. What Is An Ask?
3. What Is A Call?
4. What Is An Option?
5. What Is Stock Trading?