Bid and Ask, Spread, Volume, Market Order, Limit Order
Finance can be complex at first. But knowing some basic terms can really make a difference. This article is going to explain some key finance terms in terms of what they mean and why. Break it down as simply as I can – so you can feel more comfortable when discussing finances.
Bid and Ask
The first, and perhaps most fundamental, bit of jargon is that of bid and ask. Bid price is what people are willing to pay for stock or asset. What if you want to buy a new smartphone? So you check online, and the price is $500. That’s your bid. Now think about the ask price as the price the seller wants. The ask, though, is whatever the seller put down when they list the phone at $550.
These prices are when you hear someone saying the market is moving. More specifically, this means that the bid and ask spread are close to zero, so that buyers don’t want to pay much more and sellers don’t want to accept much less. Less interest in a stock is indicated by a wider spread. If you know this you can make better choices about buying or selling.
Spread
Then let’s discuss spread. It is the difference between the bid and ask prices, which is just the spread. For example, the spread is 5% when the bid is $100 and the ask is $105.
Why does the spread matter? It can tell you about the liquidity of a stock, said well. When that spread gets smaller, the buyers and sellers are more interested. Faster trades are a result of this. Whereas a small spread would indicate not many people trade that stock. Once you know the spread, you can choose if it’s the time to buy or sell.
Volume
Now, let’s discuss volume. Volume represents the number of shares or contracts traded in some period. It’s like the number of people coming to a concert. The concert is popular is if there are a lot of people around. In finance, we say high volume means a lot of people are interested in the stock.
If the volume of a stock is low, it does not mean that the stock is not popular right now. That’s a red flag for investors. More often than not, trading at these levels results in more accurate pricing. Because volume can affect their strategies, Traders watch volume closely.
Market Order
Next, we have a market order. A market order is an order to buy or sell a stock instantly at current market price. What about if you are in a crowd of people at a busy market, where buyers and sellers come and go, the merchants lined up in rows, some by themselves and others together? On the fruit stand, you can see apples for $2 each. You’ve pitched in for apples now; you go and buy a few. That’s to say a market order.
A market order stands when you agree with whatever price is offered at the moment; This kind of order is easy and quick. But it may not always get you the best price. The price of the stock will change quickly, before your order gets executed if the stock is volatile.
Limit Order
Next, we’ll talk about the limit order. A market order is different than a limit order. It’s an order to either buy or sell a stock at a given price or higher. Say you would like to buy shares of a company at $50. Your order will go through if the stock price falls below $50.
This gives you more control over the price you pay. However, the downside is that your order might not get filled. If the stock never reaches your limit price, you won’t make a trade. Many investors use limit orders to avoid unexpected price swings, especially in a volatile market.
At MoneyPhobia, we aim to break down complex finance topics into easy-to-understand pieces. So, don’t hesitate to keep learning! The more you know, the better your financial decisions will be.
I a finance writer with 2+Year of Exp in financial topics. With BBA in Finance degree, content writer, SEBI-certified investor, and stock market enthusiast.
