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Options 101: Bid Ask, Open Interest and Volume

15 June 2022 - 01:22 WIB

This is what financial brokerages mean when they state that their revenues are derived from traders “crossing the spread.” 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 last price represents the price at which the last trade occurred.

If you have a tight bid/ask spread, over 100 contracts of open interest, but little volume you can still safely make your trade. Bid and ask is a very important concept that many retail investors overlook when transacting. It is important to note that the current stock price is the price of the last trade – a historical price. On the other hand, the bid and ask are the prices that buyers and sellers are willing to trade at. In essence, bid represents the demand while ask represents the supply of the security.

Bid and ask defined

In particular, they are set by the actual buying and selling decisions of the people and institutions who invest in that security. If demand outstrips supply, then the bid and ask prices will gradually shift upwards. When different sellers want to sell stocks (or other securities), they set the price that they want. The asking price is the lowest price of all the sellers for a particular stock. For example, you may see an ask on the stock market that says $3.21 x 1,000.

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate. Profit is a way to help measure how good (or bad) a company is at making money — It’s total revenue, minus total expenses.

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When you place a market order, you’re agreeing to buy at the next available ask price or sell at the next available bid price. The order goes through as long as there’s a bid (if you’re a seller) or an ask (if you’re a buyer). Traders use the bid-ask spread as an indicator https://www.bigshotrading.info/ of market liquidity. High friction between the supply and demand for that security will create a wider spread. 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.

Not investment advice, or a recommendation of any security, strategy, or account type. Say you want to celebrate your new purchase with a burger and fries. When you drive your new wheels to the pick-up window, the price you see is the price you pay. However, if you think the price is too high, you may go somewhere else. Sometimes, these bid-ask spreads will look minimal since they may only amount to a few cents.

The Bid-Ask Spread

Each acquisition of a security on a different date or for a different price constitutes a new tax lot. A tax lot is a record of the details of a purchase or acquisition of a security. On most sites, if you find the chart of the underlying stock, there will be a link to the related options last bid ask chains. If someone wants to buy right away, they can do so at the current ask price with a market order. Spreads on U.S. stocks have narrowed since the advent of “decimalization” in 2001. Before this, most U.S. stocks were quoted in fractions of 1/16th of a dollar, of 6.25 cents.

• High friction between the supply and demand for that security will create a wider spread.
• So a seller could immediately sell a stock at that price the moment a willing buyer for the shares emerges.
• Conversely, ask price is the lowest price investors are willing to sell a security for at any given time.
• As a result, there is no real ‘current’ price to speak of – that’s what the bid-ask rate is for.
• The spread ends up being a transaction cost, as market makers pocket the cost of the spread.

For that, you might shop around a bit or use an app to help you find the best price. When you cruise gas stations looking for a better price, you’re combing through the ask prices because you probably have a “bid” price in mind you want to pay. Highest price an investor will accept to pay for a security. Major currencies, i.e. the most highly traded currencies, generally have bid and ask prices that differ in their fifth significant figure only (referred to as a pip).

Impact of the Bid-Ask Spread

Most free finance websites and tools will only equip you with delayed prices, although this is changing. By following this guide you should be sitting in a much better position to be able to take advantage of this stock trading technique. Because the bid-ask spread simply shows what other people are willing to buy and sell their shares at right now, it doesn’t accurately represent the factual, ‘true value’ of a share or company.