The Bid and Ask Prices in Trading Explained for Beginners

A stock market can be compared with an auction featuring different market participants buying and selling securities via bid and ask price. To succeed, traders should know all options they have before placing an order.

Because the asset value is set to buy market participants, investors need to learn how to understand and read the bid ask price. This skill will let them identify potentially profitable trading opportunities no matter if they plan to go long or short.

How Does the Bid and Ask price Work?

As stated earlier, the concept works the same way as an auction:

1. A buyer on the one hand announces the sum he or she is willing to spend. It is a bid price.
2. A seller announces the sum he or she is willing to recover as compensation for the security. It is an ask price.

In the world of modern technologies and advanced brokerage, market participants no longer need to coordinate the bid and ask price themselves. The process is usually maintained by full-scale trading platforms. Some of them establish fees, which may also affect the final bid ask price.

Every time you place an order in an effort to purchase or sell a security, the system will process it using a set of criteria and rules necessary for executing a trade. Sometimes, investors want to complete the transaction as soon as possible. It means buying an asset at any price handed by the market at a given period.

The Bid Ask Pricing Concept

Modern pricing software makes it possible to see the bid ask price formation of an underlying asset. Keep and mind that they are never the same. As a rule, the bid price is always a bit lower than the ask price.

If you want to buy a stock, you will need to pay the ask price. If you want to go short on stocks, you will receive revenue in the form of the bid price. Spread is the difference between the bid ask price. It is the amount of commission or profit brokers make for maintain transactions on users’ behalf.

Market Orders for Instant Transactions

Market orders always go to the top of the list with other orders pending. So, it is the fastest way to instantly buy or sell an asset. The main downside here is that you are likely to get the highest ask or the lowest bid price.

This type of order works great only if you need to go long or short as soon as possible. After submitting the market sell order, get ready to receive the lowest buying price available across the market. Oppositely, when placing a market buy order, you will purchase the asset at the highest possible price.

The Bottom Line

Despite the amount of spread, the majority of traders still choose the bid and ask price model. It has proved to work well despite some small commissions charged by a broker. The good news is that you can always look for the best trading conditions and find investment opportunities with the lowest spreads.

If you do not feel like paying someone else and want to branch out, we recommend trying paper trading first. Otherwise, the risks of losing real money are higher than ever before. As a beginner, you may not clearly realize how to use advanced strategies mainly used by seasoned traders. So, the best way to succeed is to start from baseline trading models that involve bid ask pricing.

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.