What does the bid/ask thing mean when looking at a specific stock?

Question

What does it specifically refer to? Does it have anything to do with buying the company? If anybody can help that would be greatly appreciated.

Answer 1

The "bid" price is what that person is willing to pay if you have some of that stock to sell.  The "ask" price is what they want if you want to BUY some of that stock.

Answer 2

I own this and want to sell it for $15.00, that is what I am asking for it.

You want to buy it and you are bidding $14.00 for it.

There will be no sale while the bid stays at 14.00 and the ask is 15.00. My friend comes along and says he likes it and will pay $15.00, his bid matches the other guys ask and a sale is made. Now the next guy selling the same thing wants $15.05 for it. The new ask is $15.05 , my bid is still $14.00. No trade.

Another guy comes along and says he wants it and will pay whatever the guy who has it wants right now, he puts in a buy order at the market! He gets it for 15.05, the next guy wants $17.00 for it, and my bid is still 14.00. However another owner comes along, needs to sell his right away and sells I will sell it for whatever the current high bid is. He puts in a sell order at the market and gets done at 14.00, my high bid!

The more people selling and buying, that is the higher the volume the higher the spread, the difference between the bid and the ask. Hope that helps. Remember most exchanges, the NY Stock Exchange, The American Stock Exchange are auction exchanges where people bid on a stock.

Answer 3

Imagine a market in a single stock as a large room, like a gymnasium. Sellers are lined up on one side and buyers are lined up on the other side. The sellers have each stated a price at which they will sell. The buyers have each selected a price at which they will buy.

In the middle of the room there is one man holding book. He is the market maker (NYSE calls him the specialist). His job is to keep the buyers and sellers in the queue with the best offers at the head of the queue.

Now let's say the best seller price "asked" is $10.10 and the best buyer price "bid" is $9.90. Even though some sellers have been waiting, if someone runs into the room and says he will sell at $10.05, he goes to the head of the line.

There might be a lot of buyers lined up at $9.90, first to post at that price gets in first. There may only be a few sellers at $10.10 and others at $10.20 and then many more at $10.25.

Someone runs into the room and says "I want to buy now!" The market maker then gives him the best asking price ($10.05). Someone else runs and says, "I want to buy now!" and the market maker gets him the bets "bid" price.

The other job of the market maker is to keep the stock liquid. If there are no buyers or sellers near the middle, he might become a buyer or seller himself just to keep the market customers active.

Those sellers and buyers who are waiting have posted their prices, they have placed "limit orders." Those buyers and sellers who want it now are making "market orders."

When you look at a bid-ask spread you can see the number of shares at the bid and ask prices, but you have no idea how many shares are wanted or offered at prices just beyond the spread.

If there are a large number of sellers at a particular price, it creates an effective price "ceiling" for that stock. A lot of orders would have to be lifted before the price can move up. The fact is, experienced traders are aware of the reasonable price for particular stock and know where (how much) to place thier market orders. That is why you will often see a lot of orders setting a "floor" or "ceiling" for a stock price.