Can someone explain what the bid and ask prices mean relative to the current price? If I buy shares, why would I pay more? The current stock price you're referring to is actually the price of the last trade. It is a historical price — but during market hours, that's usually mere seconds ago for very liquid stocks.
Whereas, the bid and ask are the best potential prices that buyers and sellers are willing to transact at: But, think of the bid and ask prices you see as "tip of the iceberg" prices. Their bids are the highest currently bid; and there are others in line behind with lower bid prices. So the "bid" you're seeing is actually the best bid price at that moment. If you entered a "market" order to sell more than shares, part of your order would likely be filled at a lower price.
Their ask prices are the lowest currently asked; and there are others in line behind with higher ask prices. So the "ask" you're seeing is the best asking price at that moment. If you entered a "market" order to buy more than shares, part of your order would likely be filled at a higher price.
A transaction takes place when either a potential buyer is willing to pay the asking price, or a potential seller is willing to accept the bid price, or else they meet in the middle if both buyers and sellers change their orders. There are primarily two kinds of stock exchanges. The one I just described is a typical order-driven matched bargain market , and perhaps the kind you're referring to.
The other kind is a quote-driven over-the-counter market where there is a market-maker , as JohnFx already mentioned. For illiquid stocks that are harder to deal in, the spread is larger wide to compensate the market-maker having to potentially carry the stock in inventory for some period of time, during which there's a risk to him if it moves in the wrong direction.
And more to the point, your order would become the new highest-bid price until somebody else accepts your bid for their shares. Of course, there's no guarantee that with a limit order that you will get filled; your order could expire at the end of the day if nobody accepts your bid.
The bid price is what buyers are willing to pay for it. The ask price is what sellers are willing to take for it. If you are selling a stock, you are going to get the bid price, if you are buying a stock you are going to get the ask price. As others have stated, the current price is simply the last price at which the security traded.
For any given tick, however, there are many bid-ask prices because securities can trade on multiple exchanges and between many agents on a single exchange. This is true for both types of exchanges that Chris mentioned in his answer. Chris' answer is pretty thorough in explaining how the two types of exchanges work, so I'll just add some minor details.
In exchanges like NASDAQ, there are multiple market makers for most relatively liquid securities, which theoretically introduces competition between them and therefore lowers the bid-ask spreads that traders face. Although this results in the market makers earning less compensation for their risk, they hope to make up the difference by making the market for highly liquid securities.
This could also result in your order filling, in pieces, at several different prices if your brokerage firm fills it through multiple market makers. Of course, if you place your order on an exchange where an electronic system fills it the other type of exchange that Chris mentioned , this could happen anyway.
In short, if you place a market order for shares, it could be filled at several different prices, depending on volume, multiple bid-ask prices, etc. If you place a sizable order, your broker may fill it in pieces regardless to prevent you from moving the market. This is rarely a problem for small-time investors trading securities with high volumes, but for investors with higher capital like institutional investors, mutual funds, etc. This is tangentially related, so I'll add it anyway. In cases like the one described above, all-or-none AON orders are one solution; these are orders that instruct the broker to only execute the order if it can be filled in a single transaction.
Most brokers offer these, but there are some caveats that apply to them specifically. I haven't been able to find some of this information, so some of this is from memory. All-or-none orders are only an option if the order is for more than a certain numbers of shares. I think the minimum size is or shares. Your order won't be placed until your broker places all other orders ahead of it that don't have special conditions attached to them.
I believe all-or-none orders are day orders, which means that if there wasn't enough supply to fill the order during the day, the order is cancelled at market close. AON orders only apply to limit orders. Thank you for your interest in this question. Because it has attracted low-quality or spam answers that had to be removed, posting an answer now requires 10 reputation on this site the association bonus does not count. Would you like to answer one of these unanswered questions instead?
Questions Tags Users Badges Unanswered. Join them; it only takes a minute: Here's how it works: Anybody can ask a question Anybody can answer The best answers are voted up and rise to the top. In my online brokerage account, I want to buy a particular stock and I see: Amir 1 8 8. Probably since the last trade at It could easily have been: See also past answers about bid versus ask, how transactions are resolved, etc. Basically, "current" price just means the last price people agreed upon; it does not imply that the next share sold will go for the same price.
The most common form is likely "iceberg" orders. Here, an order is entered, say, to buy shares, but it has a "max floor" of - meaning to display at most shares at a time. If I'm sold the shares, the quote will automatically update to buy another at the same price. So someone could sell me shares even though they think I only want to buy Very often, if you enter a market order to sell more than the displayed quantity, you will be filled at the current bid price without moving into lower price levels.
Jer Thanks for the information on "iceberg" orders. Rea May 28 '11 at 8: Tim No, I did mean If you enter a market order to buy, you would pay somebody's asking price. Your "bid" in a market order is essentially "the lowest price somebody is currently asking". A market order does not limit the price , whereas a limit order does limit what you are willing to pay.
Rea Jun 18 '12 at Both prices are quotes on a single share of stock. I do get charged additional brokerage for conducting transactions regardless of the spread. This answer manages to totally not answer the question as asked. No offense will be taken. JohnFx You're most welcome, and thank you for your positive attitude and your service to the SE community.
I opted for a comment in this case because I lack the reputation score to downvote, this being my first visit to this particular SE site. If I was concerned about offending you, I wouldn't have left the comment that if left, would I have? Rea Jun 12 '13 at You would pay more simply because the available sellers that are going to sell to you are not willing to settle for less than Actually there is often significant "hidden" liquidity.More...