How does the stock market work? What is a bid price? What is an ask price? What’s the difference between a bid and an ask price? What does it mean when people say the stock market is an auction market?
Hey everybody, Andre here at the Coach’s Hangout. Well, I’m just heading back from the cottage. I had to check in on it as per my insurance policy requires me to do and had to deal with a septic tank issue that I’m not even going to get into. But I’m heading home now and I decided to pull over for a quick coffee and decided to record this impromptu Coach’s Hangout video.
Now, obviously this is a lot more casual than the Blog articles that I normally post, but I still think you’re going to find it really helpful. I just got off the phone with a friend’s brother and he shared with me, and it was quite excited to share with me, that he’s finally decided to do some investing and he’s buying stocks on one of those do it yourself platforms … and this intrigued me.
So I asked him, “Well, how are you deciding what to invest in? How are you deciding what to buy? What stocks to buy?” , and he shared with me that he really doesn’t have much of a system at all. I mean, he’s new to investing, right? So he doesn’t really know what he’s doing. He is picking stocks to invest in based on a hunch or a whim, and he’s even getting into penny stocks. Now I’ve heard of people gambling this way. I’ve heard in office pools and whatnot. I’ve heard of people picking the winner of the Final Four March Madness basketball competition, and they even won by picking the winner based on perhaps the color of the team’s uniform or they liked the name … and maybe even won, but they got lucky.
Your odds weren’t very good. They got lucky and won, but it’s certainly is not a good way to be picking stocks but that’s what he’s doing. Now, obviously in a Coach’s Hangout blog and video, I really can’t cover that concept. I mean, it takes years of learning and experience and skill to be able to pick your own stocks, so I can’t cover that, but he did ask me some pretty basic questions that I think would interest our viewers and certainly he should know as well.
So the first thing he asked me was, “What’s the difference between a bid and an ask price?” Well, what you need to understand is the stock market is what we call an auction market. So for a moment, let’s step away from stocks because I think many of our viewers would be more familiar with different types of auction markets. Let’s pretend you are at a car auction of some sort and you see this car that the person is asking $10,000 for, and you think it’s a reliable car and you want to buy it.
They are asking $10,000 for this car. What are your options? You could bid $10,000 and if they are asking $10,000 and you are bidding $10,000, well there’s a match and you are probably going to get that car. But if you think that $10,000 is too high an ask price, maybe you could bid $9,000. Now, are you going to get the car? Well, it’s really going to depend on, does the seller cave and lower their ask price so there’s a match and potentially you got a deal? And that’s really how the stock market works as well.
There’s a whole bunch of sellers out there, right? So what the exchange will do is they are going to list the lowest ask price. Let’s say you want to buy ABC shares and right now the lowest ask price is $10. You have the same options. You could bid $10 and if they are asking $10 and you are bidding $10, there’s a match, and probably your order is going to be filled … assuming there’s enough volume. But if you think that $10 is too high, you could be at a different price, maybe you bid $9. Are you going to get the stock? Well, it’s all going to depend on if there is a seller out there that lowers their ask price to $9 and there’s a match, and a trade is probably going to take place assuming there is enough volume available.
When you buy stocks, there is really two main categories of orders that you could place. You can place what is known as a market order. Now, if you’re placing a market order, basically what you’re saying is, “Look, I want to buy this stock and I’m willing to accept whatever the market price happens to be.” If you do that, you are almost guaranteed to get the stock. Again, assuming there is enough volume. But another type of order you could enter, if you think that perhaps the ask price is too high at $10, you could enter what’s known as a limit order where you limit your price.
Maybe you place a bid with a limit price of $9. Again, right now the ask price is $10, but you bid a limit price of $9, and you are only going to get the stock if the ask price goes down. So, again, there’s two main types of orders. There is a market order where you are willing to accept whatever the market price happens to be, or you could place a limit order where you specify the maximum price you are willing to pay if buying and the minimum price you are willing to accept if selling.
If you’re taking the Canadian Securities Course, you are going to learn about other types of orders too. You are going to learn about something called a stop-buy order or a stop-loss order. Doesn’t that sound interesting? You are going to learn about other types of orders and, of course, we simplify those as well. If you are prepping for your exam, we will simplify these orders in our condensed study guide, in our key concept video lessons, and our exam prep questions with detailed answer keys. Thanks for dropping by the Coach’s Hangout and keeping me company on my way home, and good luck on your upcoming exams.