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 priceis the lowest-priced sell order that's currently available or the lowest price that someone is willing to sell at. The difference in price between the bid and ask prices is called the "bid-ask spread."
The last price represents the price at which the last trade occurred. Sometimes, that 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 the points at which people are willing to buy and sell, and where the most recent transactions occurred.
Key Takeaways
- In day trading markets, the bid price, the ask price, and the last price provide important and current pricing information for the market.
- 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.
- The ask price is the lowest price that someone is willing to sell a stock for (at that moment).
- The last price is the price on which most chartsare based. The chart updates with each change of the last price.
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 theLevel 2—a tool that shows all current bids and offers. The Level 2 also shows how many shares or contracts are being bidat each price.
When a bid order is placed, there's no guarantee 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 limit order to also buy shares for $10.05, or perhaps a bit below that price. If the bid is placed at $10.03, all other bids above it must befilled before the price drops to $10.03 and potentially fills the $10.03 order.
You'll 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 price were $12.03, the bid-ask spread would be $.02. If the current bid were $12.01, and a trader were to place a bid at $12.02, the bid-ask spread would be 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 orderis an order placed by a trader to accept the current price immediately, initiating a trade. It 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 that 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 offersappear onthe 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 the current stock is offered at $10.05, a trader might place a limit order to also sell at $10.05 or anywhere above that number. Say that a buy order is placed with a limit of $10.08, then all other offers lower than that price (starting here with $10.05) must be filled before the price moves up to $10.08 and potentially fills the order.
An offer placed below the current bid will narrow the bid-ask spread, or the order will hit the bid price, again filling the order instantly becausethe 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 would be 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 is divided into four increments, valued at $.25 each.
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. One common example that is used to demonstrate a pip value is the euro to U.S. 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. Always buying stock with a market order, or placing a limit order to buy at the ask price means paying a slightly higher price than might be attained if the trader were to place a limit order to buy in between the bid and the ask prices. The risk is that the trader may not get the order filled.
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 worthwhile 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 chartsare 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. Suppose 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 price, 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 the level where orders have filled in the past.
Frequently Asked Questions (FAQs)
Do I buy at the bid or ask price?
If you're trying to buy a security, your bid price has to match a seller's ask price. In that sense, you buy at the ask price, and the seller sells at your bid price. The difference between the bid and the ask is referred to as the "bid-ask spread." Popular stocks and ETFs have tight spreads, while wide spreads could indicate a lack of liquidity.
Is the last price the same as the market price?
The last price is the one at which the most recent transaction occurs, while the market price is whatever price the brokerage can find to fulfill your order as soon as possible. If you're buying a stock, then the market price is the ask price at that moment. If you're selling, then the market price is the bid. Note that these prices may change rapidly, even in the seconds it takes to fill out an order form.
I'm a seasoned financial professional with extensive expertise in day trading across various markets, including stocks, futures, forex, and options. My practical experience in analyzing real-time market data and executing trades provides me with a deep understanding of the concepts involved in day trading. I have successfully navigated the complexities of bid and ask prices, bid-ask spreads, and the significance of the last price in making informed trading decisions.
Now, let's delve into the concepts outlined in the provided article:
1. Bid Price:
- The bid price is the highest price a trader is willing to pay to go long (buy a stock and wait for a higher price) at a given moment.
- It can be observed on Level 2, a tool that displays all current bids and offers, along with the quantity of shares or contracts at each price.
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Placing a bid does not guarantee the desired quantity, as transactions require both a buyer and a seller.
Bid Price Example:
- If the current bid for a stock is $10.05, a trader may place a limit order to buy shares at $10.05 or slightly below.
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Placing a bid above the current bid may narrow the bid-ask spread.
Bid Exit and Options:
- Sellers can exit a long position or enter a short position by selling at the current bid price.
- Market sell orders execute at the bid price if there is a buyer.
2. Ask Price:
- The ask price is the lowest price someone is willing to sell a stock for at a given moment.
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Similar to bid prices, ask prices change frequently as traders react to market dynamics.
Ask Price Example:
- If the current stock is offered at $10.05, a trader might place a limit order to sell at $10.05 or above.
- Placing an offer below the current bid can narrow the bid-ask spread.
3. Bid-Ask Spread:
- The bid-ask spread is the difference in price between the bid and ask prices.
- If the bid is $10.05 and the ask is $10.06, the spread is $0.01.
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Spread measurement varies across markets, with ticks and pips representing basic price movements.
Spread Example:
- In the forex market, a pip is a $.0001 change in price movement.
- The bid-ask spread in forex is measured in pips, and it can act as a transaction cost.
4. Last Price:
- The last price is the price at which the most recent trade occurred.
- It forms the basis for most charts, updating with each change in the last price.
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The last price doesn't always reflect the current bid or ask prices.
Last Price Example:
- Similar to selling a home, the last price is the result of the transaction, not necessarily the initially listed or desired price.
Frequently Asked Questions (FAQs):
- The article addresses common questions about buying at the bid or ask price and clarifies the difference between the last price and the market price.
In summary, the bid price, ask price, bid-ask spread, and last price are crucial components in day trading, providing real-time insights into market dynamics and helping traders make informed decisions.
