Sections
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Understanding the Bid-Ask Spread
- The Bid is the price where you can sell
- The Ask is the price where you can buy
The bid will always be displayed on the left and the ask will always be displayed on the right:
Example: $1.00 x $1.10
(Bid) (Ask)
(Bid) (Ask)
This means that someone is willing to pay $1.00 for a security and someone is attempting to sell the security for $1.10.
Understanding the Quoted Size
Additionally, you may also see a "size" associated with the bid and the ask. This represents the number of contracts or shares that the bid and ask are willing to be bought or sold for. For a stock trade, the size will be a multiple of 100 shares so if you see a bid for $10.00 with a size of 2, someone is willing to buy 200 shares for $10.00 per share.
Example: $10.00 x $10.05
2 x 7
2 x 7
Here someone is willing to buy 200 shares for $10.00 per share and someone is willing to sell 700 shares for $10.05.
For options, the size represents the number of contracts. Here a size of 2 represents 2 option contracts.
For options, the size represents the number of contracts. Here a size of 2 represents 2 option contracts.
Example: $1.50 x $1.55
20 x 50
20 x 50
Here someone is willing to buy 20 contacts for $1.50 per contract and some is willing to sell 50 contracts for $1.55 per contract.
How the Bid-Ask Spread and Size Relate to Liquidity
You will hear the term liquidity used frequently when trading stocks, options and futures. Liquidity is referring to two main things, the width of the bid-ask spread and the size that is being represented. Here are two examples of liquidity:
Example 1: Good Liquidity
Bid 2.10 x 2.15 Ask
Size 435 x 650 Size
Bid 2.10 x 2.15 Ask
Size 435 x 650 Size
In this example, if the bid-ask spread is tight (very close together) and there is a large amount of size on both sides of the market. Something that has good liquidity (is liquid) will always have a narrow bid-ask spread and a large number of contracts on both the bid and the ask.
Example 2: Bad Liquidity
Bid 1.50 x 2.10 Ask
Size 4 x 9 Size
Bid 1.50 x 2.10 Ask
Size 4 x 9 Size
In this example, the bid-ask spread is very wide and there aren't very many contracts on either side of the market. Markets that have poor liquidity are not ideal trading environments.
As a whole, you want to trade in markets with good liquidity that offers the trader the ability to get in and out of trades when you want or need to.