Bid, Ask, and Last Prices Defined
An Illustration of How Bid, Ask, and Last Prices 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 price, the ask price, and the last price. 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 sell at. The bid price 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 closing prices for the evening. Collectively, these prices let traders know at what points people are willing to buy and sell, and where the most recent transactions occurred.
The Bid Price
The bid price is the highest price that a trader is willing to pay to go long (buy a stock and wait for a higher price) at that moment. Prices can change quickly as investors and traders act across the globe. These actions are called current bids. 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 they want. 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.
Bid Price Example
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 (and the trade automatically takes place). The bid-ask spread is the range of the bid price and ask price. If the bid price were $12.01 and the ask was $12.03, the bid-price spread is $.02. If the current bid is $12.01, and a trader places a bid at $12.02, the bid-ask spread is narrowed.
Bid Exit and Options
A seller who wants to exit a long position or immediately enter a short position (selling an asset before buying it) can sell at the current bid price. A market sell order will execute at the bid price (if there is a buyer).
As a result, traders have a number of options when it comes to placing orders. They can place a bid at, below, or above the current bid. A bid above the current bid may initiate a trade or act to narrow the bid-ask spread.
A market order is also an option. A market order is an order placed by a trader to accept the current price immediately, initiating a trade. This is used when a trader is certain of a price, or when the trader needs to exit a position quickly.
The Ask Price
The ask price is the lowest price someone is willing to sell a stock for (at that moment). Similar to all other prices on an exchange, it 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.
Ask Price Example
If a current stock offer is $10.05, a trader might place a bid at $10.05 or anywhere above that number. If a bid 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 bid will either narrow the bid-ask spread or the order will hit the bid price, again filling the order instantly because the sell order and buy order matched.
A market order works in this scenario as well. If someone wants to buy right away, they can do so at the current ask price with a market order.
The Bid-Ask Spread
If a bid is $10.05, and the ask is $10.06, the bid-ask spread would then be $0.01. However, this is simply the monetary value of the spread. The bid-ask spread can be measured using ticks and pips—and each market is measured in different increments of ticks and pips.
The tick and pip units of measure are established to demonstrate the most basic movements in an investment. In the active futures markets, the tick is used—generally, the spread is one tick. One tick is worth $1, and a tick is divided into four increments, valued at $.25 per increment.
The Forex market uses pips as a unit of measure. A pip is a .0001 change in price movement. To determine the value of a pip, the volume traded is multiplied by .0001. A common example used to demonstrate a pip value is the Euro to US dollar (EUR/USD), where a pip equals $10 per $100,000 traded (.0001 x 100,000). If the EUR/USD had a bid price of 1.1049 and an ask price of 1.1051, the spread would be two pips (1.1051-1.1049).
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 could be attained if the trader placed a bid at the current price.
Similarly, 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 ask 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 change your chart 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 of $325,000. After much negotiation, the sale finally goes through at $335,000. The last price is the result of the transaction— not necessarily what you hoped to get, 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 at that moment, while the last price shows at what price orders have filled in the past.