WHAT ARE BID AND ASK PRICES?
There are lots of terms and stats available to someone who is beginning to learn how to buy stocks. It is natural that things can get confusing because not only do you need to become familiar with what these terms mean but you also need to figure out what ones are the most important.
When you go onto most any stock site online, you get a quick summary for the stock symbol you put in that looks something like the one below. Information included here are the basics such as what price the stock traded at last, the previous day’s closing price, what price the stock opened at that day, the bid and ask prices, the days range and 52 week range, the volume of shares traded, the market capitalization, the P/E ratio, earnings per share, and the dividend amount and yield. You can see most of those in the stock summary of Apple below:
For a beginner, that’s a lot of numbers and data to digest and it is best to learn what each one means one at a time. Additionally, some of those numbers are more important than others so that is something to take into consideration. For instance, in my over 25 years of buying and selling stocks, it is likely that I have never paid attention to the bid and ask prices. They just aren’t important in my opinion and I have never bothered with them.
The bid price is what someone is willing to pay for the stock at any one moment. The ask price is what a seller wants for that stock. There are of course thousands of these (or more) at any one time and so the numbers you see on your screen like the $389.70 and $389.98 are just indications that you can use to get a feeling for what people are asking and bidding. The x200 and x100 you see in the bid and ask example above means that the bidder wants to buy 200 shares and the seller wants to sell 100 shares.
The difference between the bid and ask numbers you see on the screen is called the spread and usually during the trading day the spread is quite small. When the markets are closed the spreads may become bigger and then narrow down again when the market is open.
For me or anyone who buys stocks for the long haul, a quarter of a point or whatever the difference of the bid and ask prices are just isn’t information that I care about. I either want the stock at the price it is going for or I don’t and I’m not going to worry about that small a difference. I buy stocks with the belief (and hope) that they will go up much more than those small spread amounts. I want the stocks I buy to go up 10%, 20%, 50% or more so the bid and ask price isn’t something that I have ever given much consideration to.
Another reason I don’t pay much attention to the bid and ask prices is because what you see on the screen at any one moment may be delayed and even if it isn’t, it will change by the time you get your order in anyway. Most trading on both the New York Stock Exchange and the NASDAQ is done by computer now and so those numbers aren’t really real time.
Ultimately, it is important to know what bid and ask means when it comes to stocks because it is a supply and demand concept that drives the market. However, whether you need to pay any real attention to the buy and sell prices every time you are about to buy or sell a stock is something I don’t think you need to do, especially if you are investing with a long time horizon.
