When it comes to stock quotes, there are three numbers you need to know before you decide what stocks to buy now. These are the bid, the ask, and the spread.
All three matter whether you’re buying or shorting stocks, and even for options trading. They’re critical to helping you to identify what stocks will help you make the most money and when you should execute a given trade.
But what are the bid, the ask, and the spread? And why do they matter when it comes to stock quotes?
What Are Stock Quotes?
Stock quotes are information about shares of a specific stock that is traded on the exchange. Many people think that stock quotes are just single numbers, such as saying that Company XYZ is trading at $42 per share. That’s actually only one piece of the puzzle.
Most stock quotes include bid, ask, volume, and last-traded price, the latter of which is the most common number people cite when they talk about stock quotes. Of course, people are constantly trading shares in stock, so the last-traded price fluctuates frequently.
Like any marketplace, a stock exchange is governed by the consumers — people who trade shares of stocks. Stock quotes reflect how the market feels about a given stock.
Additionally, the more data points you have, the better. That’s where volume comes in.
Let’s say you’re thinking about buying a collectible at a garage sale to sell on eBay for some extra cash. You pull out your smart phone and search the collectible.
Currently, there is only one for sale, and it’s going for $50. You assume that the market will pay $50 for the collectible.
That’s not always the case, though. Maybe the seller has a sentimental attachment to the item, which has artificially inflated the sale price.
But what if there were 20 of those collectibles on eBay, all selling for an average of $50? That would make it a far better bargain, assuming you could buy it for a lower price at the garage sale. You know that lots of people are selling the collectible, and you have a good idea for its value.
The same goes for stock quotes. If a stock isn’t being actively traded, you probably don’t want in.
What Is the Bid Price?
The bid price in stock quotes is the amount of money an investor is willing to pay for shares of a given stock. An investor might put in a buy order for Stock ABC at $20 per share, meaning that he or she is willing to buy that stock if a seller is willing to accept $20 for it.
This is important because it reflects the market sentiment. If a trader is feeling bullish on a stock, he or she will likely up the bid price to increase his or her chances of collecting more shares. Conversely, when an investor is bearish on a stock, the bid price goes down.
Just like any other marketplace, there are no forced trades. In other words, just as a sales associate at Walmart can’t force you to buy a pair of jeans, the stock exchange can’t force you to buy shares of stock at a specific price. You get to decide what you’re willing to pay.
What Is the Ask Price?
Stock quotes have two major sides: the bid price and the ask price. The ask price is what someone who owns shares in a given stock is willing to sell them for. It’s just like a vendor at a farmer’s market. The vendor decides what he or she is willing to sell a bushel of apples for.
These checks and balances are what make the stock market work. If stock prices were governed by something other than the market, nobody would invest because they couldn’t use their expertise or experience to predict future price action.
When you’re looking at stock quotes, make sure you know both the bid and ask prices. How far apart are they? How much have they changed in the last two hours or two months?
What Is the Spread?
We’ve covered the bid price in stock quotes, which is the amount of money an investor is willing to pay for shares of a stock, and the ask price, which is what a stockholder will sell for. The spread is the difference between the two prices.
Let’s say that the bid price for Stock ABC is $12 and the ask price is $12.50. The spread is $0.50.
When the spread is too wide, very little trading occurs. Investors can’t agree on a sale price for a given stock, so volume goes down. In many cases, this results in a lack of supply, which is also called float. This means that there aren’t many, if any, available shares for purchase.
Why Do Bid, Ask, and Spread Matter?
Stock quotes are more complicated than most people think, and understanding the bid, ask, and spread will make you a more successful trader. You’ll begin to pick up patterns on the exchange as you watch these numbers fluctuate and even out.
Where Can You Find Good Stock Picks?
If you’re looking for stock picks based on today’s stock quotes, subscribe to my publications. I’m constantly sending out advice based on my investigation of current stock quotes so you don’t have to do any of the heavy lifting.
It’s always a good idea to educate yourself on the jargon associated with stock quotes. Even if you follow most of my stock picks, you’ll get a better understanding of how Wall Street works and when you should enter and exit your positions.
To learn more about what stocks to buy now, sign up for Weekly Money Call. You’ll receive weekly stock picks that I’ve chosen after surveying stock quotes across the market.