Why Are Bid And Ask Prices Important?

Halal Investment Series Part 6

The bid and ask prices shown on a finance portal or your broker’s trading screens are the prices at which you may make an immediate purchase or sale. Assume you find a stock with an offer of $20.1 and an ask of $20.2. This means that an entity or institution is actively looking for that stock and has agreed to pay $20.1 per share.

The bid price is the highest price that a particular buyer will pay for a security. Furthermore, the asking price is the lowest price a seller accepts for security. Hence, to distinguish between these two prices is called the spread. It is where the smaller the spread, the higher the liquidity of the security given.

If you want to sell at this price, you could do so right away. This is because $20.1 is a legally binding buying price for as long as it is shown on your computer. The $20.2 figure indicates that someone who owns this stock has listed it for sale at $20.2. If you want to buy the stock, you can do so right away at this price.

The figures you see next to the bid and ask prices are the quantities of assets you can buy or sell at these levels.

Let’s say you buy up all the quality of shares left under the ask price and still want to buy more, the asking price will go to the next quantity higher.   

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