Bid and ask prices are market terms representing supply and demand for a stock. The bid represents the highest price someone is willing to pay for a share. The ask is the lowest price someone is willing to sell a share. The difference between bid and ask is called the spread. A stock's quoted price is the most recent sale price.
Making a Trade
To make a trade, an investor places an order with their broker. The mechanics of the trade vary depending on the type of order placed. However, the general process involves brokers submitting an offer to a stock exchange. Each offer to purchase includes the number of shares requested and a proposed purchase price. The highest proposed purchase price is the bid and represents the demand side of the market for a given stock.
Each offer to sell similarly includes a quantity offered and a proposed sale price. The lowest proposed selling price is called the ask and represents the supply side of the market for a given stock. An order to buy or sell is filled if an existing ask matches an existing bid.
If no orders bridge the bid-ask spread, there will be no trades between brokers. To maintain effectively functioning markets, firms called market makers quote both bid and ask when no orders are crossing the spread.
Consider hypothetical Company ABC, which has a current best bid of 100 shares at $9.95 and a current best ask of 200 shares at $10.05. A trade does not occur unless a buyer meets the ask or a seller meets the bid.
Suppose an investor places a market order to buy 100 shares of Company ABC. The bid price would become $10.05, and the shares would be traded until the order is filled. Once these 100 shares trade, the bid will revert to the next highest bid order, which is $9.95 in this example.