ANSWERS: 1
  • Because stocks move from owner to owner electronically, many part-time investors don't understand how stocks are actually traded. For those who have purchased real estate, purchasing stock takes on the same methodology.

    Method

    A stock transaction has two main parties: A buyer and a seller. The buyer is attempting to buy the stock for the cheapest price and the seller is trying to sell for the highest price possible. To agree on a purchase price, negotiation or haggling, takes place.

    The Ask

    The price that the owner is attempting to sell their shares of stock for is referred to as the ask. The ask is the higher of the two prices.

    The Bid

    The bid price is what the potential buyer is willing to pay for the owner's stock. This price is the lower of the two prices.

    The Spread

    The spread is the difference between the bid price and ask price. For stocks that are traded in high frequency, the spread is very small, sometimes less than 1 cent. For stocks traded less frequently, the spread can be much larger.

    Placing the Bid

    Any time an investor contacts his stockbroker and places an order, a bid is placed. If the bid matches up with a seller's ask price, the trade is made. If it doesn't, it will not execute until an ask price matches or the potential buyer raises his bid price.

    Source:

    SEC.gov: Explanation of Bid

    More Information:

    Beginner Money Investing: How Stocks are Negotiated

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