how does bid and ask work for stocks: a practical guide

how does bid and ask work for stocks — clear, step-by-step explanation of bid, ask, spread, order books, liquidity providers, execution rules, costs, and practical tips for traders and investors.

2026-02-05 04:49:00

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Bid and Ask (in Stock Markets)

how does bid and ask work for stocks? This guide explains the core quote system used to list, match, and execute trades on exchanges: the bid (highest buy price), the ask or offer (lowest sell price), and the bid-ask spread (the difference between them). Read on to learn definitions, how order books and order types interact with quotes, who provides liquidity, what moves spreads, and practical steps traders and investors can use to manage execution costs.

What you will gain: concise definitions, worked numerical examples, execution strategies (limit vs market orders), how to interpret depth and slippage, and quick FAQs for everyday decisions.

Definitions and basic concepts

Bid price

The bid price is the highest price that current buyers are willing to pay for a share. When you sell immediately using a market order, your trade typically executes at the best (highest) bid available. A quoted bid is often paired with a size (number of shares) that the buyer is willing to purchase at that price.

Practical note: if you place a sell market order, you accept the bid price and the quoted size may determine whether you receive a full or partial fill.

Ask (offer) price

The ask price — sometimes called the offer — is the lowest price at which current sellers are willing to sell a share. When you buy immediately with a market order, you typically pay the best (lowest) ask. Like the bid, the ask is quoted with a size showing how many shares are available at that price.

Practical note: aggressive buyers consuming the ask remove liquidity; passive sellers placing limit orders at or below the ask provide liquidity.

Bid-ask spread

The bid-ask spread is the difference between the ask and the bid:

Absolute spread = Ask − Bid (in dollars)
Percent spread = (Ask − Bid) ÷ Midpoint × 100% (or divide by price)

The spread is a visible transaction cost: if you buy at the ask and immediately sell at the bid, the spread is the immediate cost (ignoring fees and taxes). Spreads also act as a proxy for liquidity — tighter (smaller) spreads usually indicate deeper, more liquid markets, while wider spreads indicate thinner liquidity and higher trading friction.

Market mechanics — how trades occur

Order book and quoted markets (Level I / Level II)

Most exchange-traded stocks use a limit order book, an electronic ledger where buy and sell limit orders are matched. Key points:

Top of book: the best bid and best ask are the highest buy and lowest sell prices currently available (Level I quote).
Depth / Level II: shows additional bids and asks at other price levels and quantities, illustrating how much volume exists beyond the best quotes.
Quoted sizes: each price level includes a size (shares) that limits how much can trade at that price immediately.

Example: an order book snapshot might show:

Bid: $99.90 (1,000 shares)
Ask: $100.00 (500 shares)

If you submit a market buy for 700 shares, you will take 500 shares at $100.00 and the remaining 200 shares will lift the next ask price.

Order types and interaction with quotes

Market orders: execute immediately at the best available opposite-side quotes. Market orders take liquidity and guarantee execution (not price). They can suffer from price moves while the order fills, especially in thin markets.
Limit orders: specify a maximum buy price or minimum sell price and will only execute at the limit price or better. Limit orders provide liquidity when they rest on the book. They offer price control but not guaranteed execution.
Stop and stop-limit orders, pegged orders, and other advanced types add execution conditions; each interacts with quotes differently.

How they affect execution:

A market buy consumes liquidity at the ask and may incur slippage across multiple ask levels if size > quoted ask size.
A limit buy placed at the bid provides liquidity and waits for sellers to accept that price.

Execution rules and priority

Most exchanges use price-time priority:

Best price: orders at more aggressive prices match before worse prices.
Time priority: among equal-priced orders, the earliest order executes first.

Other considerations:

Partial fills occur when the available size at a price cannot satisfy the order quantity — the order remains for the unfilled portion.
Large orders will often sweep multiple levels of the book, producing market impact and higher average execution price for buys (or lower for sells).

Market participants and liquidity provision

Market makers and liquidity providers

Market makers (or designated liquidity providers) continuously quote both bids and asks for selected securities to facilitate trading. Their functions include:

Posting two-sided quotes to earn the spread while managing inventory risk.
Increasing displayed liquidity and helping narrow spreads under normal conditions.
In modern markets, many market-making roles are electronic: high-frequency firms and algorithmic liquidity providers quote across many symbols and venues.

Market makers profit from capturing the spread, rebates, and sometimes from internal risk management strategies.

Retail vs institutional participants; broker routing

Retail traders often submit orders through brokers that route trades to exchanges, dark pools, or market makers. Some brokers internalize orders (match retail flow against their own books) or route to liquidity providers.
Institutional traders typically submit large orders, often using algorithms, broker-dealers, or dark pools to minimize market impact.
Practices such as payment for order flow (PFOF) exist in some jurisdictions, where market makers pay brokers for order flow; this affects where and how retail orders reach quotes. Brokers generally have obligations to seek best execution under applicable rules.

When viewing order books or trading, retail users can use reputable exchanges and trading platforms — for on-chain trading and wallet custody, Bitget and Bitget Wallet are among platform options for traders who want consolidated order-books and execution services. Always verify venue characteristics and execution quality.

Factors that influence bid and ask (and the spread)

Liquidity and average daily volume: high average daily volume tends to produce tighter spreads.
Volatility and news: sudden volatility and major news releases typically widen spreads as liquidity providers protect against adverse selection.
Time of day: spreads are often wider at market open and close, and in pre-market or after-hours sessions when participation is lower.
Security characteristics: low-priced (penny) stocks, low float, or thinly-traded securities usually have wider spreads; tick size rules can also matter.
Market structure and competition: more competition among liquidity providers and tighter venue integration generally narrow spreads.

Real-world example from tokenized equities: As of January 21, 2026, according to Ondo Finance and coverage by DailyCoin, Ondo Global Markets launched over 200 tokenized U.S. stocks and ETFs on Solana, sourcing liquidity from major exchanges to allow large trades with minimal slippage — illustrating how sourcing deep external liquidity can materially reduce spreads for on-chain trading.

Measuring and interpreting quotes

Absolute vs percentage spread, quoted size and depth

Absolute spread: e.g., Ask $100.05 − Bid $99.95 = $0.10 spread.
Percent spread: ($0.10 ÷ $100.00) × 100% = 0.10%.

Compare spreads across prices using percent spread to normalize differences.

Quoted size and depth matter: a $0.10 spread with only 100 shares at the best bid/ask is less favorable for a 10,000-share trader than a $0.12 spread with 100,000 shares available.

Slippage and realized transaction cost

Slippage is the difference between the expected price (e.g., best displayed quote) and the actual execution price. Example:

Best bid = $99.90 (1,000 shares), best ask = $100.00 (500 shares).
You submit a market buy for 1,500 shares. Execution:
- 500 shares at $100.00 (best ask)
- Next ask level 800 shares at $100.15
- Remaining 200 shares at $100.20

Average execution price = (500×100.00 + 800×100.15 + 200×100.20) ÷ 1,500 ≈ $100.12. Immediate round-trip cost if sold immediately at best bid (assuming bid still at $99.90 and sufficient size) equals about $100.12 − $99.90 = $0.22 per share plus fees.

Slippage includes both the visible spread cost and additional market impact across book levels.

Practical implications for traders and investors

Impact on trading costs and returns

Spread is an implicit cost: each round trip (buy then sell) incurs roughly the spread, so frequent traders (and those with small per-trade profits) are more affected.
Large institutional-sized orders can pay significant market impact if not carefully executed; algorithms and dark pools are common ways to reduce realized costs.
For long-term investors, spread matters less per trade but wide spreads on infrequent trades (e.g., buying a low-liquidity IPO) can raise entry costs.

Execution strategies to minimize cost

Use limit orders when price certainty matters and you can wait for execution — place resting orders at or near the bid/ask to provide liquidity.
Trade during high-liquidity periods (e.g., mid-day for many equities) to access tighter spreads.
Split large orders into smaller slices or use VWAP/TWAP algorithms to reduce market impact.
Consider dark pools or block trading venues for very large trades when available and appropriate; for on-chain tokenized stocks, institutional routing that sources deep external liquidity (as reported for Ondo Global Markets) can reduce slippage for large-size trades.

When market orders are appropriate

Use market orders when execution certainty and speed are critical — for example, to exit a position quickly in an emergency — and you accept price uncertainty. For small retail orders in highly liquid stocks, the cost difference between market and limit orders may be negligible, but in thin markets or during high volatility, market orders can produce unexpectedly poor prices.

Special situations and edge cases

After-hours and pre-market trading: spreads widen and depth thins; order types and matching rules differ across venues.
Penny stocks or OTC securities: spreads can be extremely wide, and quoted sizes small; execution risk is high.
Market stress, halts and fast markets: liquidity can evaporate and spreads can spike; exchanges may use halts or auctions to restore orderly trading.
Corporate actions, earnings, low-float or newly listed IPOs: quoting behavior can change dramatically around such events, producing wider spreads and higher volatility.

Bid and ask in other markets (brief comparison)

Stocks vs. cryptocurrencies

Similarities:

Both can use order books with bids and asks; market and limit orders interact similarly.

Differences:

Trading hours: many crypto venues operate 24/7 while stock exchanges have defined trading sessions (plus pre-/post-market).
Venue fragmentation and settlement: crypto markets often have more fragmented liquidity across exchanges, and settlement/finality models differ.
Fee models: crypto exchange fee schedules (maker/taker) can influence whether participants provide or take liquidity.
On-chain tokenized stocks: recent developments (e.g., Ondo Global Markets on Solana) show tokenized equities can leverage off-chain exchange liquidity to reduce slippage, while traditional on-chain pools often rely on automated market makers (AMMs) with different pricing dynamics.

When discussing wallets and custody for crypto-linked trading, Bitget Wallet can be mentioned as a user choice for managing assets before and after trades.

Other asset classes (forex, options, futures)

FX often quotes in pips and uses electronic limit order books and dealer markets; spreads can be very tight for major currency pairs.
Options spreads reflect model prices, volatility, and delta; spreads are typically wider and depend on contract maturity.
Futures have tick sizes and standardized contract sizes; exchanges and clearinghouses standardize execution and settlement rules.

Regulatory and market-protection aspects

Best execution and reporting (e.g., NBBO in the U.S.)

Brokers and dealers have obligations to seek best execution under applicable rules. In the U.S., the National Best Bid and Offer (NBBO) aggregates quotes to define the best displayed bid and ask across participating venues, helping ensure fair executions when routing orders.

Market maker obligations and transparency rules

Some markets impose quoting obligations on designated market makers (e.g., minimum displayed sizes and maximum spreads during normal markets). Transparency rules require trade and quote reporting to consolidate market data so participants can see the best displayed prices.

Frequently asked questions

Q: Why is ask always higher than bid?

A: The ask is the lowest price sellers will accept and the bid is the highest price buyers will pay; the difference compensates liquidity providers and reflects immediate transaction cost.

Q: How does the bid-ask spread affect long-term investors?

A: For buy-and-hold investors, the spread is a one-time entry/exit cost and typically less impactful than market returns, but it matters when trading illiquid or small-cap stocks.

Q: Can I avoid paying the spread?

A: You can avoid paying the displayed spread by placing limit orders that provide liquidity (e.g., buy at bid or slightly above), but execution is not guaranteed and you may wait or not fill.

Q: Why do spreads widen in news events?

A: During news-driven volatility, liquidity providers widen spreads to protect against adverse selection and rapid price movement, reducing their risk of being picked off.

Example calculations and worked examples

Example 1 — Basic spread and percent spread:

Bid = $49.90, Ask = $50.00
Absolute spread = $0.10
Percent spread = ($0.10 ÷ $49.95 mid) × 100% ≈ 0.20%

Example 2 — Cost of immediate buy+sell (round-trip cost):

Buy at ask $50.00 (500 shares), immediate sell at bid $49.90 (500 shares)
Round-trip spread cost = $0.10 per share × 500 = $50, ignoring fees

Example 3 — Partial fills and order book impact:

Order book (asks):

$100.00 — 500 shares
$100.10 — 1,000 shares
$100.50 — 2,000 shares

You place a market buy for 2,000 shares. Execution:

500 × $100.00 = $50,000
1,000 × $100.10 = $100,100
500 × $100.50 = $50,250

Total cost = $200,350; average price ≈ $100.175 per share. If the best bid remains at $99.95 after this buy, an immediate round-trip cost would reflect the average buy price minus the achievable sell price.

Practical checklist: what to check before you trade

Check the quoted bid and ask and the quoted sizes at best prices.
Inspect depth (Level II) if placing larger orders: will your order sweep multiple levels?
Choose limit orders when price certainty matters; use market orders when execution speed is essential.
Trade during liquid hours to access tighter spreads; avoid thin pre-/post-market liquidity unless necessary.
For very large trades, consider algorithms, block venues, or liquidity providers to reduce slippage.

Final notes and next steps

Understanding how does bid and ask work for stocks helps you separate price from execution risk. The bid, the ask, and the spread together show the immediate cost of trading and the available liquidity — and the order book reveals how large orders will interact with quotations. Use limit orders to control price, market orders for speed, and check depth to anticipate slippage. For traders working across on-chain and off-chain venues, developments in tokenized equities (reported as of January 21, 2026) demonstrate that sourcing deep external liquidity can narrow spreads and reduce slippage for large trades.

If you want to see live order books and practice placing limit vs market orders, consider exploring exchange features and wallet integrations on platforms such as Bitget and Bitget Wallet for consolidated market access and execution tools. Explore more Bitget features to compare order types, view depth charts, and test execution styles in a controlled environment.

This article is educational and neutral in tone. It does not provide investment advice. Verify execution policies and fees with your broker or trading platform before placing trades.

The content above has been sourced from the internet and generated using AI. For high-quality content, please visit Bitget Academy.