Trading Definitions: Bid, Ask, and Last Price
How the Bid, Ask, and Last Price Affect Day Trading
Day trading markets such as stocks, futures, Forex, and options have three separate prices that update in real time when the markets are open: the bid, the ask, and the last prices. They provide important and current pricing information for the market in question.
The bid price represents the highest priced buy order that's currently available in the market.
The ask price is the lowest priced sell order that's currently available or the lowest price that someone is willing to go short or sell at. The bid/ask spread is the difference in price between the bid and ask prices.
The last price represents the price at which the last trade occurred. Sometimes this is the only price you'll see, such as when you're checking the newspaper.
Collectively, this information lets traders know at what points people are willing to buy and willing to sell, and where the most recent transaction occurred.
The Bid Price
The bid price is the highest price that a trader is willing to pay to go long at that moment, and it can change fast and furiously as investors and traders act across the globe. Current bids appear on the Level 2—a tool that shows all current bids and offers. The Level 2 also shows how many shares or contracts are being bid at each price.
There's no guarantee when a bid order is placed that the trader placing the bid will receive the number of shares, contracts, or lots that he wants. Each transaction in the market requires a buyer and a seller, so someone must sell to the bidder for the order to be filled and for the buyer to receive the shares.
If the current bid on a stock is $10.05, a trader might place a bid at $10.05 or anywhere below that price. If the bid is placed at $10.03, all other bids above it must be filled before the price drops to $10.03 and potentially fills the $10.03 order.
You'll either narrow the bid/ask spread or your order will hit the ask price if you place a bid above the current bid. Your order will be filled instantly because your buy order interacted with a sell order.
A seller who wants to exit a long position or immediately enter a short position can sell to the current bid price. A market sell order will execute at the bid price.
As a result, traders 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 that 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.
The Ask Price
The ask price is the least someone is willing to sell a stock for at that moment. It, too, changes frequently as traders react and make moves. The ask price is a fairly good indicator of a stock's value at a given time, although it can't necessarily be taken as its true value.
Current offers appear on the Level 2. Again, there's 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 so that orders can be filled.
If a current stock offer is $10.05, a trader might place an offer at $10.05 or anywhere above that number. If an offer is 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 because the sell order interacted with a buy order.
If someone wants to buy right away, she 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 $0.01 in active stocks. For example, the bid is $10.05, and the offer is $10.06.
In active futures markets, the spread is typically one tick. The Forex market isn't centralized, so it sees more variation in the bid/ask spread, but it will range from 0.1 to 1.5 pips in active pairs.
The spread can act as a transaction cost. 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.
It's the 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, so it's sometimes worth it to get in or out quickly. At 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
The last price is the price on which most charts are based. The chart updates with each change of the last price. It's possible to base a chart on the bid or ask price as well, however. You can just change your charting settings accordingly.
Think in terms of the sale of any other asset. You've decided to sell your home and you list it at $350,000. You receive an offer for $325,000. After much negotiating, the sale finally goes through at $335,000. The last price is what the transaction ultimately went through at, not necessarily what you hoped to get for the property nor what the buyer hoped to pay.
The last price is the most recent transaction, but it doesn't always accurately represent the price you would get if you were to buy or sell right now. The last price might have taken place at the bid or ask, or the bid or ask price might have changed as a result of or since the last price.
The current bid and ask prices more accurately reflect what price you can get in the marketplace right now, while the last price shows at what price orders have filled in the past.