Bid higher than stock price

A key component of stock market investing is the trading of stocks and funds, a process often handled by brokers, specialists and market makers, working in tandem with individual stock exchanges. In executing stock and fund trades, investors need to understand the concept of bid versus ask, which defines the supply and demand for a specific financial asset. If you want to trade securities at a maximum advantage, getting a good grip on bid versus ask should be a priority. The bid-ask on stocks, also known as the "spread" is the difference between a stock's bid price and its ask price. Normally, the ask price is higher than the bid price, and the spread is what the broker or market maker earns in profit from managing a stock trade execution.

What is the difference between the bid price and ask price?

The terms spread, or bid-ask spread, is essential for stock market investors, but many people may not know what it means or how it relates to the stock market. The bid-ask spread can affect the price at which a purchase or sale is made, and thus an investor's overall portfolio return. Investors must first understand the concept of supply and demand before learning the ins and outs of the spread.

Supply refers to the volume or abundance of a particular item in the marketplace, such as the supply of stock for sale. Demand refers to an individual's willingness to pay a particular price for an item or stock. The size of the spread and price of the stock are determined by supply and demand.

However, in some instances, a specialist who handles the stock in question will match buyers and sellers on the exchange floor. In the absence of buyers and sellers, this person will also post bids or offers for the stock to maintain an orderly market. On the Nasdaq, a market maker will use a computer system to post bids and offers, essentially playing the same role as a specialist. However, there is no physical floor. All orders are marked electronically.

When a firm posts a top bid or ask and is hit by an order, it must abide by its posting. In other words, in the example above, if MSCI posts the highest bid for 1, shares of stock and a seller places an order to sell 1, shares to the company, MSCI must honor its bid.

The same is true for ask prices. In short, the bid-ask spread is always to the disadvantage of the retail investor regardless of whether they are buying or selling. Popular and heavily traded stocks have significantly lower bid-ask spreads, while thinly traded stocks in low demand have significantly higher bid-ask spreads.

The primary consideration for an investor considering a stock purchase, in terms of the bid-ask spread, is simply the question of how confident they are that the stock's price will advance to a point where it will have significantly overcome the obstacle to profit that the bid-ask spread presents.

The bid-ask spread is essentially a negotiation in progress. To be successful, traders must be willing to take a stand and walk away in the bid-ask process through limit orders. By executing a market order without concern for the bid-ask and without insisting on a limit, traders are essentially confirming another trader's bid, creating a return for that trader. Trading Basic Education. Your Money. Personal Finance. Your Practice. Popular Courses. Key Takeaways The bid-ask spread is largely dependant on liquidity—the more liquid a stock, the tighter spread.

When an order is placed, the buyer or seller has an obligation to purchase or sell their shares at the agreed-upon price. Different types of orders trigger different order placements. Some order types, like fill-or-kills, mean that if the exact order is not available, it will not be filled by the broker.

Market Order — A market order can be filled at the market or prevailing price. Limit Order — An individual places a limit order to sell or buy a certain amount of stock at a given price or better.

The key point an investor using limit orders must keep in mind is that if they are trying to buy, then the asking price, not merely the bid price, must fall to the level of their limit order price, or below, for the order to be filled. If it is not filled that day, the order is canceled. Stop Order — A stop order goes to work when the stock passes a certain level.

Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Related Articles. Partner Links. Related Terms Bid-Ask Spread Definition A bid-ask spread is the amount by which the ask price exceeds the bid price for an asset in the market.

The Role of Market Makers Market makers compete for customer order flow by displaying buy and sell quotations for a guaranteed number of shares. Bid and Ask Definition The term "bid and ask" refers to a two-way price quotation that indicates the best price at which a security can be sold and bought at a given point in time. Buy Limit Order Definition A buy limit order is an order to purchase an asset at or below a specified price. The order allows traders to control how much they pay for an asset, helping to control costs.

Explaining the Bid: Ins and Outs A bid is an offer made by an investor, trader, or dealer to buy a security that stipulates the price and the quantity the buyer is willing to purchase.

The bid-ask spread is the difference between the bid price and ask shares at the next best offer price, which might be higher than $ The stock exchanges use a system of bid and ask pricing to match buyers and they are never the same; the ask price is always a little higher than the bid price.

The stock market functions like an auction where investors—whether individuals, corporations, or governments—buy and trade securities. It's important to know the different options you have for buying and selling, and a large portion of this is understanding bid and ask prices. The buyer states how much they're willing to pay for the stock, which represents the bid price, and the seller names their price, known as the ask price. Once you place an order to buy or sell a stock, it gets processed based on a set of rules that determine which trades get executed first. If your main concern is buying or selling the stock as soon as possible, you can place a market order, which means you'll take whatever price the market hands you.

Have you ever bought a stock and were surprised by the price you paid? Maybe you paid less than you expected or perhaps you paid more.

Stock trading is like thousands of transactions that take place everyday in other venues just like the stock market with one common denominator, a buyer and a seller. Stock trading is not unlike the retail world, where supply and demand reflect the price of goods and services just like supply and demand determines the price of individual equities.

What Is Bid-Ask Price Spread and How Is It Used for Trading?

By using our site, you acknowledge that you have read and understand our Cookie Policy , Privacy Policy , and our Terms of Service. It only takes a minute to sign up. Can someone explain what the bid and ask prices mean relative to the current price? If I buy shares, why would I pay more? The current stock price you're referring to is actually the price of the last trade.

The Basics of the Bid-Ask Spread

A bid is the price a buyer in a market is willing to pay for a stock, bond , currency, or commodity, as well as the amount that the buyer is willing to purchase. The bid is the highest price that a buyer in a market is willing to pay for a security , commodity, or currency. A bid stipulates both the price and the quantity that the buyer is willing to purchase. When you are placing your bid for a stock , you are competing against all other buyers in the market. You often place a bid through a broker a person or firm who matches buyers and sellers. That offer is your bid. If a seller is willing to sell stock at that price, the trade will be executed. The price you offer to pay is your bid. The seller may accept or reject your bid — and that will determine if the transaction happens.

Why Zacks?

The terms spread, or bid-ask spread, is essential for stock market investors, but many people may not know what it means or how it relates to the stock market. The bid-ask spread can affect the price at which a purchase or sale is made, and thus an investor's overall portfolio return.

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A bid price is the highest price that a buyer i. It is usually referred to simply as the "bid". In bid and ask , the bid price stands in contrast to the ask price or "offer", and the difference between the two is called the bid—ask spread. An unsolicited bid or purchase offer is when a person or company receives a bid even though they are not looking to sell. A bidding war is said to occur when a large number of bids are placed in rapid succession by two or more entities, especially when the price paid is much greater than the ask price, or greater than the first bid in the case of unsolicited bidding. In other words, bidding war is a situation where two or more buyers are so interested in an item such as a house or a business that they make increasingly higher offers of the price they are willing to pay to try to become the new owner of the item. In the context of stock trading on a stock exchange , the bid price is the highest price a buyer of a stock is willing to pay for a share of that given stock. The bid price displayed in most quote services is the highest bid price in the market. The ask or offer price on the other hand is the lowest price a seller of a particular stock is willing to sell a share of that given stock. From Wikipedia, the free encyclopedia. This article is about financial bidding. For other uses, see Bid disambiguation. This article relies largely or entirely on a single source.

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The bid price is the highest price a buyer is prepared to pay for a financial instrument, while the ask price is the lowest price a seller will accept for the instrument. The difference between the bid price and ask price is often referred to as the bid-ask spread. Before attempting to trade in any market, it helps to become accustomed to the trading terminology used. Understanding basic trading terms and the market forces associated with them provides a good foundation for any trader. The difference between the bid price and ask price is one of the most basic but crucial theories to understand in trading. To understand the difference between the bid price and the ask price of a financial instrument, you must first understand the current price from a trading perspective. The current price, also known as the market value, is the actual selling price of an asset on the stock exchange. The current price is constantly fluctuating and is determined by the price at which that asset last traded. Basic economic theory states that the current price is determined where the market forces of supply and demand meet.