Essentially, the BID is the price at which a buyer or market maker is willing to buy a security. If you owned shares in a stock, say AuthenTec, and wanted to sell, it is the current price at which someone is willing to purchase your shares. You may not be happy with this price, especially for thinly traded Small-Cap and Micro-Cap stocks because a lot of times, these stocks are illiquid and market makers tend to create a huge discrepancy between the BID and ASK spread, so as to make more money from you.
Essentially, the ASK is the price at which a seller or market maker is willing to sell a security. If you wanted to buy shares in AuthenTec, this price would be the current price at which someone is willing to sell you their shares. Again, you might not be happy with this price, especially in lieu of the much lower BID price.
This is the difference between the highest price that a buyer is willing to pay for a security BID and the lowest price for which a seller is willing to sell it ASK. So if you wanted to purchase up to shares, your order would execute immediately also using a market order.
Well, this is when you might run into problems, and might have to take a lower price. You are seeing the laws of supply and demand and market economics at work! More than likely however, the market maker would never let the price go that far, and would step in at a price that would allow them to make some profit they would take both sides of the trade , and not allow such a precipitous rise or fall in the stock. This is why you MUST use limit orders at all times, especially with these kinds of stocks.
It might take some time to fill, but you are protected from not getting the price you specified and prevent the market makers from dictating to you what price they are willing to buy and sell a security for.
I included Figure 2, as an example, specifically since some stocks will trade like this one. You have to be extremely careful when placing your order for these types of stocks and never use market orders! So What Do I Do? You exercise patience and caution. Here are some steps to take to make sure you get a fair price when placing an order for a stock: This is easier said than done sometimes, so be careful.
But in the case of a penny stock, like the example above, odds are that you are going to have to actually place your limit order closer to the actual ask price and skew it towards the higher end, otherwise your order might sit there and never get filled.
Try the middle first then you might need to adjust your order accordingly. It might take awhile to fill your order, especially with low volume or illiquid stocks.
Place your order, and be patient. Be prepared to move your limit price: You might need to move the needle somewhat, and take a little bit of a hit in terms of your price outlay, and pay a slightly higher premium to make sure you get shares.
We are long term investors, not traders. These are types of limit orders that specify that either all the shares you are selling or buying get transacted, or none of them do. This is good to do for larger volume companies, but in smaller ones, it will prevent you from at least getting a few hundred shares at the price you did want because there will rarely be someone there to take out all of the shares you wanted to buy or sell.
Just take the ask price: Wall Street market makers are in this to make money, not give you stock at the lowest possible price. Armed with this information, you can now make sound decisions about what price to pay for a stock, and more importantly, get in on a great opportunity when it presents itself without being burdened with the details of how to get the best price.
Chris Fernandez is the founder of PeakStocks. To read a more detailed explanation of his investing style, please visit: At Connors Research, we are using it as an overlay to many of our best strategies to make them even better -- now you can, too. The Connors Group, Inc.More...