Trading Definitions of Bid, Ask, and Last Price
How the Bid, Ask, and Last Price Affect Day Traders
Day trading markets—such as stocks, futures, forex, and options—have three separate prices that update in real time whenever the markets are open. Known as the bid, the ask, and the last, these provide current pricing information for the market in question. They let traders know where people are willing to buy, where they are willing to sell, and where the most recent transaction occurred.
The bid price represents the highest priced buy order that is currently available for the market.
This is the highest price that a trader is willing to pay to go long at that moment. Current bids appear on the level 2—a tool that shows all current bids and offers (also called the "ask") in a marketplace. The Level 2 also shows how many shares or contracts are being bid at each price.
When a bid order is placed, there is no guarantee that the trader placing the bid will receive the number of shares, or contracts or lots, that they want. Each transaction in the market requires a buyer and seller, so someone must sell to the bidder in order for the order to be filled—for the buyer to receive the shares.
For example, if the current bid on a stock is $10.05, a trader may place a bid at $10.05, or anywhere below it. If the bid is placed at $10.03, all other bids above it need to be filled before the price drops to $10.03 and potentially fills the $10.03 order.
If you place a bid above the current bid, you will either narrow the bid/ask spread or your order will hit the ask price, in which case your order will be filled instantly since your buy order interacted with a sell order.
The bid/ask spread and the ask price are discussed later.
A seller who wants to exit a long position, or enter a short position right now, can sell to the current bid price. A market sell order will execute at the bid price. Traders, as a result, have a number of options when it comes to placing orders.
They can place a bid at or below the current bid. They can place an order above the current bid, which will possibly interact with sell orders or narrow the bid/ask spread, or they can use a market order. A market order takes any price it can find to get a trader into or out of a position.
See Making Sense of Day Trading Order Types for descriptions and examples of the various order types.
The ask price represents the lowest priced sell order that is currently available, or the lowest price someone is willing to go short or sell at. Current offers appear on the level 2.
There is no guarantee that an offer will be filled for the number of shares, contracts, or lots the trader wants. Someone must buy from the seller in order for torder to be filled.
For example, if a current stock offer is $10.05, a trader may place an offer at $10.05, or anywhere above it. For an offer placed at $10.08, all other offers below it must be filled before the price moves up to $10.08 and potentially fills the $10.08 order.
An offer placed below the current offer will either narrow the bid/ask spread or the order will hit the bid price, in which case the order will be filled instantly since the sell order interacted with a buy order.
If someone wants to buy right now, they can do so at the current offer price. A market buy order will execute at the offer price.
The Bid/Ask Spread
The bid/ask spread is the difference in price between the bid and ask. In active stocks the bid/ask spread is $0.01—for example, the bid is $10.05 and the offer is $10.06. The chart example shows a Level 2 in the SPDR S&P 500 ETF. It shows the current bid and offer, bids below the current bid, offers above the current offer, and how many shares are available to buy or sell at each price.
The spread can act like a transaction cost. For example, even in an active stock, always buying on the offer means paying a slightly higher price than what could be attained if the trader placed a bid at the current bid.
Same with selling. Always selling at the bid means a slightly lower sale price than selling at the offer. The bid and ask are always fluctuating, though, so sometimes it is worth it to get in or out quickly. Other times, especially when prices are moving slowly, it pays to try to buy at the bid (or below) or sell at the offer (or higher).
The last price represents the price at which the last trade occurred. The last price is also the price on which most charts are based; the chart updates with each change of the last price. However, it is possible to base a chart on the bid or ask price as well. You can change your charting settings accordingly.
The last price is the most recent transaction, but does not always accurately represent the price you would get if you were to buy or sell right now. The last price may have taken place at the bid or ask, and/or the bid or ask price may have changed as a result of or since the last price. Therefore, the current bid and ask more accurately reflect what price you can get in the market place right now, while the last price shows at what price orders have filled in the past.
Updated by Cory Mitchell, CMT.