It would be foolhardy for a lawyer to try and win a case and earn her fee without knowing what the facts are, what evidence and testimony is likely to be presented or without understanding the legal jargon required to represent someone in a trial. So too, you cannot successfully trade stocks or anything else on the stock market without understanding your tools, such as stock charts. This requires that you be familiar with the financial facts required to use your tool effectively. Fundamentally, you’ll need to get to grips with the bid and ask rate or price.
To that end, we will look at:
On most online stock quotes, what you’ll see is the bid, ask and last prices of a stock. When it comes to news sources, such as TV or a newspaper, you’ll usually only see the last price, or the price the stock was trading at by the time the stock exchange closed. It is important to note that bid, ask and last prices cumulatively tell you a lot about a stock, such as its spread. The relationship between the bid and ask prices for a stock at any point in trading time, is that the spread is the difference between these two, so the stock spread is also called the the bid-ask spread or bid-offer spread.
As we can already begin to see, as important as these bids and offer prices are individually and as much as we need to look at each of them in detail, there is a story that they tell when analysed together. This narrative has an impact on trading strategies.
The take-home information here is that when someone tells you, ‘Tesla stock is trading for £170’ or whatever the case may be, it doesn’t mean you should buy Tesla for that price. All this means, is that £170 was the last price. As a result, there is no real ‘current’ price to speak of – that’s what the bid-ask rate is for.
The bid and ask price is also known as bid and offer, or a stock’s bid-ask rate. It refers to a price quotation on either side of the stock’s buying and selling power spectrum. As such, it indicates the best price at which a security, such as a stock, can be sold and purchased at any given point in time. It ties together the willing buyer, willing seller concept as far as securities go:
After the buyer and seller reach price agreement, the trade is concluded.
The spread is the difference between the bid and ask prices. So, what does this have to do with liquidity?
The spread is often represented as a percentage. As an example, let’s say a a stock that is trading at £11.95 / £12. In other words, the bid price is £11.95 and the offer price is £12. Therefore, the bid-ask spread is 4 cents. Expressed as a percentage, the spread is £0.05 / £12 or 0.41%, rounded off to 0.42%/
As noted, the bid price shows the maximum price a potential purchaser is ready to fork out on a stock at any given moment in time. (There is no difference between a stock and a share; the terms are used interchangeably). The critical point is that this bid price will change as investors and traders change their position on a stock due to market sentiment changing, sometimes by the minute, as new information about a stock emerges. Remember that everyone is reading stock charts and analysing trends as they are bidding. This influences what they are prepared to bid. In general, the frequently traded stocks of the big companies have bid prices that are constantly fluctuating.
When assessing whether to buy or sell a stock, the bid price at that moment is your finite clue to the ‘auction’ price for that stock at that time. So a seller could immediately sell a stock at that price the moment a willing buyer for the shares emerges.
Remember that when reading data from the London Stock Exchange (LSE), these prices are given in pence, not cents – as they are on the New York Stock Exchange. There are of course 100 pence in a pound. So, if a bid price is shown as 221.30, that means the bid price is 221.30 pence or about 2.21 pounds.
Imagine that you’re at a trading fair in real-life, and have your eye on a vintage item. You have wanted this item for a long time but because you’re a good negotiator, you cannot let emotion get the better of you and simply pay any price for it. Because you’re not just a good negotiator but a highly skilled one, you know you not only won’t pay any price – you want to pay the lowest possible price for it. This is a fair after all, and negotiations are par for course. This is what happens:
Much like what happens on the stock market, you now have four options:
Log onto the trading platform of your broker. As a new trader, the platform, as well as the stock charts should be both functional and user friendly. They should also be at costs that best fit with the kinds of trades you will do. Therefore, you should do your due diligence before joining a broker, and consult a broker comparison as written by a professional trader.
Now look at one of the stocks in your portfolio that you’re willing to sell to give you big practice. Let’s call it stock X. See what the quote for X is as on the bid and ask price guide as your very first step. Why? You want to know what someone is willing to pay for it, so you look at the bid price.
You note that the highest someone is bidding on X is £12. So, at this moment, if you’re going to go ahead and sell, that is what you’ll get: £12. Now, sell one stock. Note the the bid price from the quote page, and check to see at what purchase price your sell order is filled at – it should be £12 at the most, but not less than your ask. Practice like this with individual stocks until you get a proper grasp of how the bid and ask price works in practice, and how spreading works and the implication for your stocks.
As we have learnt, the ask price shows the lowest price someone is willing to sell their stock for at any given moment in time. Like the bid price, it fluctuates. As a stock owner or trader re-evaluates what they are willing to let their stock go for, the share ask price changes.
Should you want to sell your stock, the ask price at that time represents its current value. It is like putting your house up for sale. You set a property price, or asking price. As negotiations get underway or new information emerges, your asking price may change.
On the stock market, this ask price is sometimes also called the offer price.
Because the bid-ask spread simply shows what other people are willing to buy and sell their shares at right now, it doesn’t accurately represent the factual, ‘true value’ of a share or company. Why would a bid-ask spread not reflect true value? This is because true value is likely not to change every five minutes, and be radically different in 6 or 12 months, which is exactly what will happen to the bid-ask spread.
How exactly do you calculate what the spread is? If someone bids in a stock at £8.50 but a seller posts an ask price of £8.53, then the bid ask spread is £0.03. It is the literal difference between the bid price and the asking price.
For a transaction to go through, someone must either lower their ask price or raise their bid price until they meet at the same price, at the same point in time.
So where to experienced traders enter their bid prices? Most of them do not enter enter their trades at the bid and ask prices quoted – unless there is a compelling reason on a share or stock chart to do so, the operative word being ‘compelling’. Instead, the norm is to trades at the mid-price, or the price half-way between the spread.
This is some of the other information you’ll often see on a stock quote. This information too will help shape your trading strategies.
Attempting to trade without a solid grasp – and not just a basic notion – of bid, ask and last prices, as well as spreads, are almost certain to result in losses.
You also need to make sure you are getting real-time quotes and not delayed prices. Usually, what is provided on TV is the delayed price, which is the quote data available 15 minutes prior. If you have a trading account, you should be getting real-time quotes.
Most free finance websites and tools will only equip you with delayed prices, although this is changing. You should always trade on real-time quotes only, especially at initial listings and in opening and market closing sessions, that is the first 10 and last 10 trading minutes, as prices are often most volatile during these periods. By following this guide you should be sitting in a much better position to be able to take advantage of this stock trading technique.