Hello traders! In this post we will discuss the bid and ask price. These are the main components that make up the quotes you see for a given stock.
Quote Example: 5.05 x 5.07
The bid price is the first price listed in the example above and it represents the highest price a buyer is willing to pay for a stock at that given moment.
The ask price is the second number listed in our example above. This is the lowest price a seller is willing to sell stock for.
Bid-Ask Tutorial Video
Okay so those terms are pretty simplistic, but the interaction between them and how it impacts the order type we use to place our trades is what’s important here.
Bid-Ask Spread or often referred to as “the spread”
This is the price difference between the bid and the ask. Now remember, we get filled on the bid when selling a stock (5.05 in our example) and on the ask (5.07 in the example) when buying it. Unless of course you are using a limit order and waiting for a specific price to come into play.
So for our example above the spread is 2 cents. On stocks below $100 that have good volume you generally will only see a spread of a cent or two. However, when you get into high priced volatile stock you could see that spread jump to 25 cents or more. The reason we need to be aware of this is because it directly impacts our risk reward scenario.
Risk vs. Reward
Before we enter any trade we should know what our risk-reward scenario is. Before we do that we must already know what are acceptable risk is on a given trade. This varies for each trader. For new traders I always suggest staying with stock under $100 or even $50 that have atleast a million shares traded everyday as they tend to have tight spreads and are still volatile enough to find trades but so much that you are gambling.
This should be part of your trading plan though, if you have not already created one you really ought to if you want to have success. Step by step direction on creating a complete trading plan is just one part of our traders foundation program. Click here to learn more: Active Trading Blueprint
Always remember, “Victory Loves Preparation”