Trillionaire Term of the Day - January 14, 2009

Bid and Ask Prices

Understanding bid and ask prices is crucial in order to understand why and how stocks move up and down in price. Buying a stock is very much like buying a product from a flea market in which prices can be negotiated based on supply and demand. In the stock market, the buyer of a stock states what price they will pay for the stock – this is the bid price. The seller also has a price – the ask price. Thus, because the seller wants to sell his stock for a higher price and the buyer wants to buy his stock for a lower price, the ask price is always a little higher than the bid price. When a buyer wants to purchase a stock, he must pay the ask price because that is the price in which the seller is willing to sell it for. At the same time, the seller will sell the stock for the bid price, because that is the price in which the buyer is willing to buy it for.

So, if there are more sellers than buyers, the bid prices (the lower one) will be the one in higher demand, thus sending the stock price lower. If there are more buyers than sellers, the ask price (the higher one) is in higher demand, and thus the stock price will increase. You might be wondering who gets the difference between what the seller sells for and what the buyer buys for. The difference, or the spread between the bid and ask price, goes to the broker who makes the deal go through between the buyer and seller. Today, the spread is usually just a cent for most trades, but before online brokers, the spread usually was around 25 cents.


This is a pretty confusing, but extremely important concept for young investors to understand. So, I have provided you guys with some other references to look at so you can really get a grasp of how important this topic is and how it works. If you have any more questions, don’t hesitate to e-mail me at collegetrillionaires@gmail.com, and I will do my best to explain it to you personally.

http://www.usatoday.com/money/perfi/columnist/krantz/2006-08-25-bid-ask_x.htm
http://www.youngmoney.com/investing/sharebuilder/goals/031021_08
http://en.wikipedia.org/wiki/Bid_and_ask


-Niki Pezeshki
College Trillionaire