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Ask TheStreet: Bid Bewilderment

Editor's Note: Ask TheStreet is designed to answer questions about the market, strategies and investment methods. Please email us to ask a question, but keep in mind that we cannot offer specific investment advice.


My questions are about the "bid" and "ask" prices. Is the bid what you purchase or sell a stock for? Same goes for the ask. Also, when they talk about the size of a market, what do they mean? -- J.P.

Gregg Greenberg: By definition, the "bid" is the price a buyer is willing to pay for a stock, while the "ask" is the price for which a seller is willing to sell. But an even easier way to think about the two prices, as well as the so-called "bid-ask spread," is in terms of supply and demand. Because when you get right down to it, those are the two forces that ultimately determine the price of a stock trading on an exchange.

Consider the case of fictional Nasdaq-traded stock WXYZ. In this example, let's say the bid price for WXYZ is $20 and the ask price is $20.50.

In plain English, this means that the highest price a buyer is willing to pay for WXYZ is $20. On the other side, the lowest price someone is willing to sell this stock is $20.50. The difference between the two sides is called the spread, which in this case is 50 cents.

With a 50-cent spread separating the highest bidder from the lowest seller, what will it take to bring the two sides together to create a sale?

The answer: Pressure in the form of supply and demand. And to find out how much pressure, you need to check out the "size" of the market.

Aside from just listing the bid and ask prices of a stock, an exchange also will print the size of the market. WXYZ, for instance, may have a bid size of "$20 x 200," which means that there is demand to buy 20,000 WXYZ shares if the price drops to $20.

Jumping to the other side, let's say WXYZ has an ask size of "$20.50 x 50" -- which means that there are only 5,000 shares for sale at $20.50.

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