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ASK PRICE / BID PRICE

Uncategorized Aug 21, 2019

Definition

The ask price is the price at which a dealer of a particular security is willing to sell the security to interested investors. A bid price is the price at which a dealer in a particular security is willing to purchase the security from investors.

Why It's Important

The New York Stock Exchange (NYSE) is an auction market. Sellers are naming ask prices and buyers are naming bid prices. So, for instance, look at it like a flea market. Apple (AAPL) has a table and you approach because you are interested in purchasing a piece of their table. AAPL says I think this piece of table is worth $10.00 (ask price). You say it's a mighty fine table but I think a piece is worth $9.50 (bid price). Let's say for illustration purposes that AAPL says ok, I will take your $9.50. Here is a piece of the table and the transaction is done. Another person, just saw that you got a piece of their table at $9.50 and comes over to purchase as well. The negotiation process starts all over. This is what happens on the back end of the stock market. As investors, when we see that a stock has closed for the day at a certain price, that is just the last agreed upon price in the market. When the bid price and ask price are in agreement, we have a transaction. The market is made up of thousands, if not millions, of little transactions every day.

*This is a very simplified version of how the market works. It is a lot more complicated than that but for the scope of this lesson, I kept it simple.*

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