Three words you need
BidThe highest price someone is willing to pay right now.
AskThe lowest price someone is willing to sell at.
SpreadThe gap between the best ask and the best bid. The wider it is, the more an immediate trade costs you.
The order book
When order-book data is available, you will see a table with bids on one side and asks on the other, each price with the quantity waiting at it. The first row holds the two best prices available now.
| Qty | Bid (buy) | Ask (sell) | Qty |
|---|---|---|---|
| 15,000 | 10.18 | 10.22 | 8,500 |
| 22,400 | 10.17 | 10.23 | 12,000 |
| 9,000 | 10.16 | 10.24 | 18,300 |
| 31,500 | 10.15 | 10.25 | 7,700 |
| 6,200 | 10.14 | 10.27 | 25,000 |
Gap between best ask and best bid
10.22 − 10.18 = 0.04
10.22 − 10.18 = 0.04
Where does an immediate order fill?
A seller who wants out now meets the best bid. A buyer who wants in now meets the best ask. So the last price can sit in between, and it is not the price you get.
Last price10.20
10.18An immediate sell starts here
10.22An immediate buy starts here
Quantity matters
ExampleThe best ask is 10.22 for only 8,500 shares. If you want 20,000 shares immediately, the first 8,500 fill at 10.22 and the remaining 11,500 at 10.23, which carries 12,000. With a limit at 10.22, the rest would wait for a seller.
Watch outIn thinly traded stocks the spread can be wide and the quantities small. Buying immediately there can cost far more than the last price shown.
See the book on a real stock
Open the order book for any stock and look at the gap between the best bid and best ask, and the quantity at each.
Check yourself
1. Last 10.20, bid 10.18, ask 10.22. Buying immediately, what will you most likely pay?
An immediate buy fills at the best ask, not at the last price.
2. Best bid 5.00, best ask 5.10. What is the spread?
Spread = best ask − best bid = 0.10.
Summary
- The bid is the highest price buyers are offering; the ask is the lowest price sellers are asking.
- An immediate buy starts at the best ask; an immediate sell starts at the best bid, not at the last price.
- Check the quantity before assuming your whole order fills at that price.