Home Finance Bid vs. Ask: What’s the Difference?

# Bid vs. Ask: What’s the Difference?

Buying and trading stocks are considerably easier than most would-be investors might think. However, while buying and selling stock is simple, there are still a few concepts and keywords you should know before you start your stock investment journey. For example, you should learn the difference between a the Bid vs. Ask price and understand the importance of the bid-ask spread to optimize all of your trades prior to making your first investment.

## What Is Bid vs. Ask?

When investors purchase a stock share or an options contract, they place a bid or the highest amount of money they’re willing to pay for the stock. Meanwhile, the seller offers an ask or the lowest amount of money they’re willing to accept for the stock. Essentially, a bid is a purchase offer while an ask is a sale offer. You’ll see these terms frequently as you begin making trades.

Usually, the bid and the ask are different. The amount between the bid and the ask for a stock share is known as the bid-ask spread. Most of the time, the ask will be higher than the bid. In many cases, the bid-ask spread goes to the broker who manages the trade as payment for their services.

Calculating the bid-ask spread by dollar amount or by percentage can help you determine how much you’ll end up spending in total on a trade. To figure out the dollar amount, subtract the bid from the ask. Multiply that number by however many shares you’re trading. To find the percentage of the total transaction, use this formula:

For example, say a stock has an asking price of \$20 and a bid price of \$19. The bid-ask spread percentage would be:

5% = (20 – 19) / 20 * 100%

The bid-ask spread percentage is 5% of the total cost of the transaction.