In stock trading or investing, the bid is the offer a buyer makes to a seller of shares of stocks or other investments. A bid includes the maximum price per share (bid price) an investor or trader is willing to pay and the amount of shares (bid size) that they are willing to buy for a specific stock. The bid works in conjunction with what is known as the ask, which is the minimum price and size a seller is willing to accept in a trade.
Bid-Ask Spread
The margin between the bid price and the ask price is known as the bid-ask spread. Stocks that are widely traded, or more liquid, will usually have a lower bid-ask spread. A bigger spread between the bid and ask prices means that a stock is less liquid and buyers and sellers may find it more difficult to find a counterparty for their trades unless they are willing to adjust their orders. For investors using market orders instead of limit orders, a trade could end up costing more because in order to fill the bid size, the investor will have to raise their bid price.
Stock Trading Liquidity
The measure of the actual market demand and liquidity for a stock is generally the size of the bid-ask spread. Liquid stocks generally have a narrower bid-ask spread because there are enough traders and investors buying and selling the stock to meet the amount of orders. A stock trader that initiates a trade by placing a market order is accepting the ask price and is basically paying the spread. On the other hand, a trader that uses a limit order can reduce the additional cost.
Market Makers in Stock Trading
Market makers serve the role of matching up trades between buyers and sellers by utilizing their individual company’s funds and maintain a stock’s liquidity. Without the assistance of market makers, buyers and sellers would be forced to hang around, waiting for a matched order. Market makers and specialists make a profit on the bid-ask spread of a stock trade.
