When attempting to add new securities to the investment portfolio, many buyers will set what is referred to as a best bid. Essentially, a best bid is the highest price that an investor is willing to pay in exchange for acquiring a security or a set of securities. There are several elements that any buyer should use when determining the best bid that will be offered for a given security.
One of the basic considerations of deciding the security price that a buyer is willing to pay has to do with the overall financial stability of the buyer. Most financial experts warn investors about overextending the amount of resources that are invested in stocks, bonds, and other types of securities. This means that the responsible buyer will not invest an inordinate amount of funds into a security that may not yield much of a return, when those funds will be needed for other obligations in the short term. Determining how much can be offered for a stock, with no need to use those funds for other purposes until a profit is realized from the investment, is absolutely necessary if the buyer is to set a best bid that is financially responsible and ultimately productive.
The performance of the security should also influence the determination of what type of best bid will be extended. There is no doubt that the seller will present the historical performance of the security in the best light possible. This means the buyer may need to look beyond the most positive aspects of the history and also take into consideration any negatives associated with the performance. Going for this more balanced approach to the trends that have impacted the security in the past will help the buyer to more accurately project future performance, and decide how much he or she is willing to invest in acquiring the security.
It should be noted that there is no magic formula that will automatically result in the proper calculation of a best bid. Individual investors have to weigh all the factors associated with setting the maximum security price that is considered acceptable. Some of these will involve the performance and current value of the security, while other factors will be more intangible, such as the degree of risk the individual buyer is willing to bring to the table. Ultimately, the best bid is the result of many different factors that must reflect security prices that the buyer can comfortably live with.
