Investing in the stock market can be intimidating — with so many ways to trade, different types of funds, and important terms to learn, the whole process can initially feel overwhelming. However, with just a little bit of knowledge and understanding, you can easily begin making effective trades to boost your wealth and manage your money. Learn about bidding, asking, and the spread between the two so you can make strong securities trades.
What Is Bid vs. Ask?
When investing in securities, you’ll often hear the terms “bid,” “ask,” and “bid-ask spread.” These refer to a few important elements of securities trading — they’re vital to executing effective, money-making trades.
A “bid” refers to the maximum amount of money a buyer or investor is willing to pay for a stock share. An “ask,” meanwhile, is the minimum amount of money a seller, or market maker, is willing to accept for a stock share. These numbers are rarely the same. The ask price is usually higher than the bid price.
The difference between the ask price and the bid price is known as the bid vs ask spread or bid-ask spread. It’s common for stockbrokers or other industry experts to assist with securities trading due to its complexity, so the bid-ask spread normally goes toward paying any fees or commissions related to the sale.
There are two order types of securities — low-liquidity stocks and high-liquidity stocks. Low-liquidity stocks don’t trade very often. The company might be small, new, or just not have much of a following. These stocks have a large bid-ask spread, since they take more effort to buy and sell, resulting in higher stockbroker fees. High-liquidity stocks are popular and trade frequently. Their bid-ask spread is usually much smaller, since it’s much easier to make these sales.
For example, MB Sales has shares of Charlie Company Inc. stock to sell at an ask of $16 per share. BMB Corp. wants to buy Charlie Company Inc. stock at a bid of $15 per share. The bid-ask spread on Charlie Company Inc. stock is $1 per share.
Use these tips to help you make the most money out of your security trades:
- Know about the company before you make your sale. Researching the company’s health can help you determine if it’s wise to buy or sell stock shares.
- Rely on data rather than emotion. It can be all too easy to get swept up in the excitement and energy of the stock market, but it’s vital that you keep your research in mind when buying or selling stocks.
- Have patience. It’s tempting to buy and sell stocks constantly to earn just a little more money, but it can be beneficial to hold on to a stock long term and grow the stock’s value.
Trading on the stock market is an effective way to develop your wealth, but it helps to figure out how trading works and the terminology associated with the industry before getting started. Make sure you understand bidding, asking, and the bid-ask spread before making any securities trades.