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Distinguish bid and offer prices for shares or stocks

Jul 23, 2008
A share is a certificate of ownership in a company. The shares of BHP, for instance, are each a tiny piece of ownership of the company BHP. If a share in BHP is purchased, the purchaser now owns a little piece of BHP. BHP, as of writing, had over 1,750,000,000 shares on issue. Once a share is purchased in a company like BHP the share can be sold at the discretion of the owner of that share.

As a share represents a share in the ownership of a company, a shareholder has a right to a say in how that company is run. This is often a theoretical right as voting on running the company is conducted on a 'one share, one vote' basis. Obviously if a shareholder has one share of BHP that shareholder has only one vote out of a possible 1,750,000,000 votes. Owners of larger number of shares have more votes and therefore more of a say in the running of the company.

What is the price of a share?

A trader telephones her broker and says, "I am interested in shares in BHP, what is the price?"

The stockbroker replies "BHP is $9.50 bid and $9.53 offered"

This "9.50 bid and 9.53 offered" means that the highest price anyone is currently willing to pay for a share (or a number of shares) in BHP is $9.50, while the lowest price that anyone is currently willing to sell a share (or a number of shares) in BHP is at $9.53.

In market jargon the "Bid" is $9.50, while the "Offer" is $9.53". This "bid and offer" terminology makes sense; a buyer is bidding to buy the shares while a seller is offering to sell the shares. The distance between the bid and the offer in this example is currently 3 cents (i.e. 9.53 minus 9.50). This distance is referred to as the "bid/offer spread", or just the "spread".

Our trader, if she wants to buy some shares in BHP, now has a couple of choices available to her. She can buy BHP shares without any further ado by buying the shares on offer at $9.53. (Similarly if she already owned shares in BHP and wanted to sell them immediately she could sell to the buyer at $9.50). If our trader did want to buy and was happy to buy at $9.53 she would say to the broker, "I want to buy 500 shares (or whatever the amount is) at $9.53". This is an "at market" order, our trader may just as easily have said to the broker "I want to buy 500 shares of BHP at market" ? this means the broker is to buy the shares for the client at the first available offer (which, as we have seen, is $9.53).

Our trader may not be happy to buy at $9.53. She may wish to try to buy the shares a little lower. Let's imagine our trader says to the broker "I want to buy 500 shares of BHP at $9.50". What she has done is placed a bid with the broker at $9.50. As we have just seen, there is already a bid at $9.50 and our trader has now expressed an interest to buy at the same price as the current bid. The bids are automatically ranked by the SEATS system in order of whoever was first. Our trader, in joining the bid at $9.50 will be ranked behind the current bids; what that means is that the other buyers at $9.50 will have their orders "filled" before our trader is filled on her order. That is, our trader will buy her shares at $9.50 only after the other buyers have bought theirs. This would seem to be a very fair way of doing things, it seems one must queue for most good things!

Our trader, however, may not be interested in joining the queue. She can, of course, buy immediately at $9.53, but if she wants to try to buy a little lower without having to join the queue our trader can place her bid at $9.51. In doing so she now becomes the highest bid in the market, anyone else asking his or her broker "Where is the market in BHP?" will now hear in reply from the broker "BHP is bid at $9.51 and offered at $9.53".

In placing her bid at $9.51 our trader is now first in line to be "filled" on her buy order. Any other trader joining her on the bid at $9.51 will be ranked behind our trader now.
About the Author
Les Freeman is an expert trader with years experience in stock trading. His ability to find right trading opportunity has helped people to make huge amounts of profits. Goto Online Trading & Home Trading
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