If you’re new to stock trading, there’s one golden rule you should always live by: bid higher than ask. By definition, the bid price is the highest price a buyer is willing to pay for a security, while the ask price is the lowest price a seller is willing to accept. So, when you’re buying stocks, you should always aim to pay less than the current ask price. Here’s a closer look at why this rule exists and how you can make it work to your advantage.
Why You Should Aim to Pay Less Than the Current Ask Price
In order for traders to make money, there needs to be a difference between the bid and ask prices. That difference is known as the spread. The wider the spread, the more room there is for traders to profit. Conversely, the narrower the spread, the less room there is for traders to make money.
Now, you might be thinking that it would be in a trader’s best interest to buy stocks at the lowest possible price (i.e. the current ask price). However, that’s not necessarily true. Remember, in order for a trade to go through, someone needs to be on the other side of that trade selling their shares to you at that price—and that person needs to be making a profit off of that sale.
If everyone attempted to buy stocks at the current ask price, there would be no one left selling their shares at that price point—and trading would come grinding to a halt. That’s why it’s important to always bid higher than ask—so there are still motivated sellers out there who are willing and able to make trades with you.
How You Can ‘Bid Higher Than Ask’ When Purchasing Stocks
There are two main ways you can bid higher than ask when purchasing stocks: limit orders and market orders.limit orders allow you specify the maximum or minimum amount you’re willing pay for a security, while market orders allow you purchase securities at their current market prices.
So if you want buy 100 shares of XYZ stock at $10 per share or less, you would place what’s known as a ‘limit order.’ Your order wouldn’t go through until another trader was willing sell their shares of XYZ stock at $10 per share or less—but once it did go through, you would have purchased those shares at $10 each.
Alternatively, if you wanted buy those same 100 shares of XYZ stock immediately—even if that meant paying more than $10 per share—you would place what’s known as as ‘market order.’ In this case your order would go through right away and you would purchase those shares at whatever their current market value happened o be—which could potentially be higher than $10 per share..
Conclusion:
When purchasing stocks, always remember to bid higher than ask so there are still motivated sellers out there who are willing and able to make trades with you. There are two main ways you can bid higher than ask when purchasing stocks: limit orders and market orders.Limit orders allow specify the maximum or minimum amount your willing pay for security ,while market orders allow purchase securities at their current market prices .Keep this helpful information in mind next time your ready make some trades!
