A bid price is the amount of money an investor desires to pay for a share of stock. Another important piece of information along with the price is the bid size, which is the number of shares the investor wants to purchase at the bid price. Many brokerage houses or online securities websites will list the current price at which a stock is selling. Investors can use this information to set the price they are willing to pay for the stock, which may be lower than the stated price.
Historically, the bid price is what floor traders would call out when they had a group of stock to sell. The price itself may have been listed on a piece of paper with the number of shares and the seller’s name or other information. Floor traders would shout the price of stocks for sale and collect bids, with the trades made for the benefit of a brokerage house and/or a private investor. While floor traders are still in use today, many of the stock trades occur with the aid of computers and software that electronically move shares of stock from one investor to another.
Along with the bid price, brokerage houses and securities websites list the asking price for different shares of stock. This asking price indicates an investor has a group of stock he desires to sell at a price close to the current market price or close to the market price. The asking price is just a suggested price; therefore, the bid price serves the purpose of buying shares of stock at a market discount. This discount helps the buyer avoid immediate losses if the market price drops immediately after an investor purchases stocks.
Another type of investing makes use of the spread between the prices based on current bids and asks from buyers and sellers. An investor can purchase the stock at a slightly lower asking price and then attempt to sell the stock immediately at a slightly higher price to another investor. Although risky, this strategy is common among floor or day traders. If done on a consistent basis, these investors can make money through a technical strategy known as scalping. Scalping involves the buying and selling of multiple securities where the investors earns a few pennies from each stock sale. The aggregate gains can produce a profit for the investor who attempts to trade securities on the bid-ask spread.