Bid, Ask, and Last Price

Many investors check stock prices and are confused because they actually see three prices... the bid, the ask, and the price. All three are very important indicators of the actual stock price, but don't feel stupid if you don't understand how to differentiate them.

The Spread and Market Makers
The spread is the difference between the bid price and the ask price. The reason for this is simple. For a stock to be traded, there has to be a "market" for it. This means that if you want to sell, there has to be someone willing buy from you; and if you want to buy, there has to be someone to sell to you. The people who "make the market" for your stock are called market makers. These are people (companies) that hold inventory of the underlying stock and regulate its buying and selling.

Since the market makers are people employed by companies, they have to make money. If they didn't make money, they couldn't be in business, and there wouldn't be a market for people to buy and sell stocks. The spread, the difference between the bid and ask, generates profit for the market making companies.

For example, take Stock XYXY with a price of 10, bid 10, ask 10.50. The spread for stock XYXY is (10.50 - 10 = .50) The market maker keeps the $0.50 per share traded. Assume that stock XYXY traded 1,000 shares yesterday, and the average spread was $0.50. That gives the market makers a profit of 1,000 shares * $0.50 = $500.

The Bid
The bid is the price that you can sell your stock for. The term "bid" comes from the fact that market makers are making a bid on the stock you own. Basically, it's the price that they're willing to give for your stock.

To simplify, think of an auction. The auctioneer is selling a Monet painting (your stock), and the people in the audience (the market makers) are bidding the price they're willing to pay.

The Ask
The ask is the price that you can buy a stock for. It's basically the amount that the market makers are "asking" you to give for the stock. A good example is when you're looking for a new car to buy (the stock). You call the owner (the market makers) from the classified ad, and the first thing you say is "how much are you 'asking' for the car?"

The Price
When looking at a stock quote the price is the dollar amount where the stock was last bought or sold. So if the last trade was a sell order, the price was actually the bid price. If the last trade was a buy order, the price quoted is actually the ask price.

Let's take a few examples.

Stock ABC: Price 15 3/4, Bid 15 3/4, Ask 16

If you want to buy stock ABC, you'll have to pay the ask of 16. If you want to sell stock ABC, you must accept the bid of 15 3/4. The spread is $0.25.

Stock XYZ: Price 77 1/2, Bid 77 3/8, Ask 77 9/16

If you want to sell stock XYZ you must accept a bid price of 77 3/8, and if you want to buy you have to be willing to pay an ask of 77 9/16. The spread is $0.183.