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Bid and Ask Price Explained - 2022 Stock Market Tips - YouTube
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When trading you will hear about the
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bid and ask price.
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So what is it?
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And how do you use it?
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And that's what we're going to talk
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about in today's video.
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So what is the bid and ask price?
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Very easy.
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The bid is the price that buyers
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are willing to pay for a stock and
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the ask is the price that sellers
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are willing to sell a stock for.
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Here's an example.
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You see in this example, buyers
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are willing to pay
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$259.06 for Apple, but
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sellers want at least
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$259.10 per share.
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So let's think about it for a
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moment.
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Some people think that the exchange
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is determining the price of a stock,
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and that's not the case.
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The price of a stock is determined
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by the price that buyers and sellers
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are willing to trade at.
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Let me give you an example.
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When you walk into an art gallery
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and you see a painting with a price
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tag of $30,000, then
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this is the ask price
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of the seller of the painting.
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It's not the fair price, it's
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simply a price that the seller would
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like to get when selling the
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painting.
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So he's asking for it.
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And you as a potential buyer could
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now offer or bid
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$20,000. And the seller now has two
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choices.
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He can accept your bid or
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he can lower his asking price
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and see if you're willing to buy the
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painting at a lower price.
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As you can see, the final trade
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price is determined by the price
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that the buyer and seller
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agree on.
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The same with stocks, the last
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price of a stock is the price that
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buyers and sellers agreed on.
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That's the price a trade was made.
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However, you cannot buy
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a stock at the last price traded,
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if you want to buy a stock you have
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to find a seller who is willing
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to sell it to you.
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Is this making sense thus far?
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Because if it does, then click
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the "Like" button and subscribe to
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this channel.
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And hit the little bell because this
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way you get a notification whenever
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I release a new video.
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So you might wonder why is the bid
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and ask price so different?
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Sometimes you will see that the bid
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and ask price is very different.
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Here's an example.
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In this example, buyers are willing
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to pay $20.80
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for this stock, but sellers
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want at least
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$21.50.
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The difference between the bid and
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the ask price is called "the
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spread." And in this example,
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the spread is 60 cents.
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In the previous example with the
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Apple stock the bid/ask spread was
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only 4 cents.
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So why is the bid and ask
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price for this stock so
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different?
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A large bid and ask spread is
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usually caused by one of the
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following two conditions.
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Either you're looking at a stock
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with low trading volume, so
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there's simply not many buyers and
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sellers, or you're
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looking at the stock during after
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hours which means outside
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regular trading hours.
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And if that's the case, then you
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will see that the bid/ask spread
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tightens immediately
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after the open.
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In the example above, I took the
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screenshot five minutes before
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the open, and shortly after
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the open the bid/ask spread was much
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smaller. Take a look at this.
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So as you can see the bid/ask spread
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tightened from $0.60
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to $0.04.
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So the next question is what
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happens when the bid and ask
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are far apart?
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Well, at some point, either
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the buyers or the sellers
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need to make another offer.
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Either the buyers need to
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raise their bid or
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the sellers have to lower
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their ask.
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Otherwise, no trade would
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take place.
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It's like in our gallery example
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from earlier.
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If the seller keeps insisting
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on a price of $30,000
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and not a cent below, and the buyer
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is only willing or able
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to pay $20,000 and
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not a cent more for the painting,
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then the painting won't be sold.
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And the same in the markets, only if
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buyers and sellers agree
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on a price a trade can
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take place.
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Is this helpful thus far?
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If it is, click the "Like" button
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and subscribe to my channel and make
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sure to hit the little bell because
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this way you get notified whenever
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I release a new video.
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So, now the question is
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what is a normal bid/ask
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spread?
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You see, when trading stocks a
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normal bid/ask spread
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is usually anywhere between
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$0.01-$0.04.
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Whenever you see a larger bid/ask
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spread, you're either looking at a
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stock that's not very liquid or
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you're looking at a stock outside
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of regular trading hours.
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Now for options a normal
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bid/ask spread is
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$0.05-$0.20 for
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two reasons.
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First of all, most options are
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trading in $0.05 increment.
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So for example,
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$1.10, $1.15, $1.20, you get the
idea.
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And the second reason is options
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are not as liquid as stocks.
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Only a fraction of traders are
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trading options and therefore
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there are just fewer buyers and
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sellers.
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So should you buy at the
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bid or the ask price?
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Let's review.
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The bid is the price that buyers are
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willing to pay for a stock and it's
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usually lower
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than the ask.
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It would be great if you could
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buy at the bid price, but most of
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the time that's not possible.
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You can either buy a stock at the
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ask price or we can
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make an offer that's between the
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current bid and the ask
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and see if one of the sellers
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is willing to take the trade.
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Here's an example.
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Buyers are willing to pay a maximum
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of $8.30 for their stock, but
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sellers
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want $8.73.
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If you wanted to buy the stock, you
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could offer $8.40
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and see if a seller is willing to
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sell you the stock at this price.
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See, often traders split the
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difference and offer a price in the
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middle and this also known as the
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mid price.
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Now, this brings us to the next
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question.
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Can you buy a stock
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for less than the asking price?
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Absolutely.
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When you step out of the pool of
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buyers and offer a higher
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price than everybody else, you might
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find a seller who is willing to take
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your bid.
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In the example above, the bid
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is $8.30 and the ask
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is $8.73.
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So the mid price would be
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$8.52. So if you would raise your
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bid to $8.50 or maybe
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$8.55, which is very close
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to the mid price, it is very
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likely that there is a seller who
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is willing to take your bid.
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Now, it is very important that
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you know what order to use if
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you try to bait
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sellers, and fortunately, I have
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a video for you that explains the
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difference between a stop order and
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a limit order and I'll link to it
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in the description below.
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So in a nutshell, if you want
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to buy a stock for less than the ask
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price, you need to use
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a limit order.
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Just watch the video to learn more
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about it.
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All right, now you know what
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the bid and ask price is and how
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to use it in your trading.
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If you found this helpful, click the
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"Like" button and subscribe to my
[441]
channel and always make sure to
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hit the little bell because this way
[445]
you get a notification whenever
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I release a new video.
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