Bid and Ask Prices in a Buy and Sell Transaction - It's Confusing

When it comes to buying and selling stocks, forex currency pairs, or other equities, it's important to understand the terms bid price and ask price.

Bid price is the highest price a buyer is willing is willing to pay for that item.

Ask price is the price a seller is willing to accept for that item.

The difference between the bid and ask price is the spread.

When dealing with stocks, the bid price displayed in most quote services is the highest bid price in the market. the ask price displayed is the lowest ask price in the market.

How does this impact the trading transaction?

Keep in mind that every trading transaction requires a buyer and a seller. When the Trader wants to buy a stock, the Trader will have to pay the Ask price (the amount of money that a seller requires in order to sell the stock). When a Trader wants to sell a stock, the Trader will have to accept the Bid price (the highest amount of money that a buyer is willing to pay for that stock at that time).

When looking at a stock chart, the current price displayed on a bar chart or candlestick chart is the bid price. However, when the stock is purchased, the actual buy price the Trader will pay is the Ask price (the price that the seller requires). As soon as the buy transaction is complete, you're in a loss position by an amount equal to the spread. Remember that the Ask price is the amount of money that a seller requires in order to sell the stock and this is higher than the bid price (the price you're willing to pay) displayed on the chart.

Let's assume that a stock has been purchased and the stock price is rising. The top of the body of the candlestick is the current bid price. Assume you set a Take Profit at $100.00 for the stock in the current trade. When the Ask price (the price you the seller are willing to accept) hits $100.00, the stock will sell. Note: This Ask price is the current Bid price (displayed on the chart) plus the spread. If the spread is $2.00, you'll receive $98 on that sale, not the $100 you might have expected.

Yes it is confusing. But, after you work with it for awhile, it will be easy to factor into your trading decisions.