A:

The bid and ask prices are stock market terms representing the supply and demand for a stock. The bid price represents the highest price an investor is willing to pay for a share. The ask price represents the lowest price at which a shareholder is willing to part with shares. The difference between the bid and ask prices is called the spread. If a stock quote features a single price, it is the most recent sale price.

Making a Trade

To make a trade, an investor places an order with his broker. The mechanics of the trade vary depending on the type of order placed, but the general process involves brokers submitting an offer to a stock exchange. Each offer to purchase includes a size requested and 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 fulfilled if there is an existing ask or bid that meets the order parameters. 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 the hypothetical Company A, 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, then, that a market bid order is placed for 100 shares of Company A. The bid price would become $10.05, and the shares would be traded until the order is fulfilled. Once these 100 shares trade, the bid will revert to the next highest bid order, which is $9.95 in this example.

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