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June 3, 2000
When it comes to buying and selling stocks most of us know that the "bid" represents the price in which an investor is willing to buy the stock at and the "ask" is the price in which an investor is willing to sell the stock at. But did you know that the price activity between the bid and ask can help you determine whether a stock will go up or down?
Even with all the sophisticated computer programs that execute trades in nanoseconds, the stock market is nothing more than a huge barter system, a place where like-minded people come together and trade pieces of a company. Like any other barter system the price of a share is determined by the root of economics -- supply and demand. Therefore, the size of a particular stock's bid and ask represents the current level of interest in the stock at the buy or sell prices.
Use the bid and ask sizes to help you monitor the supply and demand of a stock at a specific price. Are there more buyers than sellers? Typically, a stock that has significantly more bid interest (buying interest) than ask interest (selling interest) may move up in price and a stock with more ask activity than bid activity may move down. For example: You are interested in buying shares of BID.com and you see that the last trade was for 500 shares priced at $50 and the ask was for 500 shares at $50 and the bid was for 2,000 shares at $49 7/8. From this example you can see that there is a higher level of buying interest than selling interest because there are investors interested in buying 2,000 shares of BID.com and only 500 shares are available for sale. Additionally, investors are willing to pay a higher price ($50 versus $49 7/8) to own shares of BID.com as indicated by the fact that the last trade executed at $50, not 49 7/8. In this fast-moving dynamic market, the direction of a stock can turn suddenly reflecting more selling pressure and pushing the stock down. Let's say 500 shares ASK.com just traded at $20 and the ask was for 2,000 at 20 1/8 and the bid was for 500 shares at $20. The last trade tells you that sellers of ASK.com are willing to lower their ask (sell) price to get rid of their stock quickly and that there are more shares available for sale than there is buying interest (2,000 for sale versus 500 shares wanted) -- the supply is higher than the demand.
Although evaluating the bid and ask activity can be extremely helpful in determining a stock's price direction, there are many other "behind the scenes" factors that can also move a stock up or down. Sometimes the stock's market makers (the designated individuals who actually transact the purchase or sale of a stock) may be trying to accumulate a lot of stock to fill a very large institutional transaction and can artificially affect the stock price. Unfortunately, only the market markers truly know whether a stock is going up or down, but understanding the significance of the bid/ask can help increase your odds of making an intelligent trade.
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