What is an Ask?

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Definition:

The ask is the lowest price a seller is willing to accept for their stock.

🤔 Understanding an ask

Virtually every transaction has a buyer and a seller. The buyer is the person who wants to buy a security. And the seller is the person who owns a security and perhaps hopes to turn it into cash. In the stock market, buyers can set the highest price they want to pay for an asset, and sellers can set the lowest price they’re willing to accept. The bid is the highest price that a buyer is willing to pay, and the ask is the lowest price for which an asset is currently available on the market.

Takeaway

The ask is like the sticker price on a toaster at a garage sale...

Sellers usually put stickers on objects at a garage sale to show how much they want to sell it for. The asking price is like the sticker — it’s the amount the seller hopes to receive from a buyer.

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What is the difference between a bid and an ask?

When different sellers want to sell stocks (or other securities), they set the price that they want. The asking price is the lowest price of all the sellers for a particular stock. For example, you may see an ask on the stock market that says $3.21 x 1,000. These numbers mean that there are 1000 shares available at the $3.21 ask price.

On the other hand, the bid comes from potential buyers. They set the price that they are willing to pay to buy shares of that same stock. The bid price is the highest price of all the buyers. For instance, you may see a bid that says $3.18 x 500. In this case, the highest a buyer is willing to pay is $3.18 per share and there are 500 shares of stock at that price.

The asking price is always higher than the bidding price. Buyers and sellers negotiate back and forth until two agree on the same price for a particular number of shares. Then, the remaining buyers and sellers continue negotiations back-and-forth until the next pair decides on a price. If they can’t agree, the order won’t go through.

If you want to buy a stock, your bid price is the lowest ask price. On the other hand, if you’re going to sell the stock, your ask price must match the highest bid price.

What is a spread?

The difference between the asking price and the bidding price is called the “bid-ask spread” or simply the spread. There are several types of spreads.

Stock Market Spreads

Spreads vary across different trading platforms. The smallest range in the stock market is one penny or $0.01. For example, if the bid is $8.50, and the ask is $8.51, the smallest possible spread is $0.01.

Forex Spreads

In foreign exchange (aka forex) trading, the spread is customarily measured in pips. One pip is generally equal to 0.0001. Let’s say, for example, the currency pair EUR/USD was 1.1085. That means that for 1 euro, you could buy $1.1085 U.S. dollars. An example of a two pip spread would be the Forex quote increased from 1.1085 to 1.1087. Now, for 1 euro, you can buy $1.1087 U.S. dollars.

Futures Spreads

In futures trading, spreads are measured in ticks. The value of a tick varies depending on what is being traded. For example, the E-mini S&P 500’s spread or tick size is 0.25. That means that 0.25 is the minimum amount that the futures contract price can move.

Each tick for the E-mini S&P 500 is worth $12.50 (aka its tick value).

So, if the bid futures contract price is $1,411.00 and the asking price is $1,411.25, the spread is 0.25, or one tick. Since we are dealing with futures contracts, we multiply the movement (number of ticks) by the tick value to its value in dollars. A one tick spread times $12.50 (E-mini S&P 500’s tick value) would be equal to $12.50.

Why are bids, asks, and spreads relevant?

Many online pricing systems and broker trading platforms will tell you the ask and bid prices of a stock. You’ll also see the “last price” – aka the last recorded price that the stock traded at. The last price isn’t the same as the current trading price.

Instead, the current trading price, the amount that you’ll likely pay, is based on the bid and ask prices. If you are buying a stock, you’ll get the lowest ask price available. Alternatively, if you are looking to sell, you’ll see the highest bid price.

The bid, ask, and last prices give you a broader picture of trading activity. The last price can reveal the actual value of the stock because it is the most recent transaction where a seller and a buyer agreed on the price. The ask and bid prices are what the sellers and buyers want, but there is no guarantee that they will get that price.

Knowing the bid, ask, and last prices are critical so that you know what price you want to set so your order will be fulfilled. For example, if you plan to enter a trade immediately, you would set your price to match the asking price. Similarly, if you want to sell your shares quickly, you would execute an order at the bid price. Matching the current offer price will trigger an immediate transaction instead of waiting for a price that you may be more in your favor.

A broker is an intermediary that matches buyers and sellers. A market maker is a type of broker that acts as a wholesaler by buying and selling stocks to investors, especially when a stock doesn’t have a lot of buyers and sellers (that is, has low liquidity). The spread is the profit that market makers keep for filling orders.

For example, a market maker has shares of the fictional Company XYZ. To make a market, they place a bid-ask spread. Let’s say they set a bid price of $10.00 per share, and an ask price of $10.05. Now, investors can purchase stocks at $10.05 or sell their stocks at $10.00. The difference between the ask and bid price (the spread) is $0.05, which is the market maker’s profit.

You’ll also want to watch if the spread is getting too wide. For instance, let’s say you buy a stock from a seller at the asking price of $10.02. The current bid price is $10.00. So, if the stock doesn’t move and you want to exit the trade (aka close your position), you would sell your share at $10.00. But, you would be out $0.02, plus any fees. However, if the spread suddenly widens and the bid price is now $9.50, you stand to lose a lot more money. This price difference can result in substantial trading losses.

Can you buy stocks for less than the asking price?

You cannot explicitly buy stocks for less than the asking price. However, you can use limit orders to buy stocks – as well as options and futures – at your preferred price if the price moves in your favor.

A limit order is a set of specific instructions to your broker to execute a trade for a certain number of shares at a predetermined share price or better. Your broker will fulfill your purchase order only if all the conditions are met.

Limit orders give you more control over the price you pay per share. The only risk is that your order may not be fulfilled if your price and number of shares don’t match a seller in the timeframe you want.

For example, if the current ask is $5.05, you may place a bid at $5.03. All the other orders above $5.03 will be fulfilled first. If the price drops to $5.03, your order may potentially be filled.

Day orders are contracts that are automatically canceled at the end of the trading day if the parameters are not fulfilled (i.e., price requirement and the number of shares). Other orders may carry over into the next trading day. Some limit orders are open-ended until you choose to cancel them.

Why are bid and ask prices so far apart?

Most traders prefer small spreads, where the bid and ask prices are close. A tighter spread can mean trades happen more quickly because the market is filled with traders that are buying and selling a stock (aka high volume).

When bid and ask prices are far apart, there is a large spread. This spread typically happens when there is minimal trading happening on the market. A wide spread means that the stock has low volume (or very few transactions).

A stock may have low trading activity if the company is scheduled to release news, such as earning reports or an important announcement. Traders know that announcements make share prices fluctuate. As a result, they may stop trading around that time, which causes a wider bid-ask spread.

Small-cap stocks can be younger, smaller companies that may not have a lot of investor interest yet. Without a lot of buyers and sellers, the bid and ask prices may be far apart. Another reason for low trading activity may be if investors feel that a stock is over or undervalued, which can result in a bigger spread.

Ready to start investing?
Sign up for Robinhood and get your first stock on us.Certain limitations apply

The free stock offer is available to new users only, subject to the terms and conditions at rbnhd.co/freestock. Free stock chosen randomly from the program’s inventory. Securities trading is offered through Robinhood Financial LLC.

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