There is a lot to a stock’s price and when I think back all those years to when I began to learn about the stock market, reading a stock price really took some thinking about.
For example, what is the bid price? What is the difference between the bid and the ask?
What does “Last Price” mean and what does all this have to do with the price of Pineapples? All of this and more are answered in this article.
Watch this Stock Price Video, or read the article below.
Stock Price - Bid - Ask - Spread - Liquidity !
How much of the Stock Price Video did you understand?
Let’s go into the video in-depth with a step by step explanation of each of the many elements of a stock price. The example we will use is from the NASDAQ Stock Exchange.
What is Stock Price?
A Stock Price is the quoted cost of a portion of equity or single stock in a publicly listed company. Each stock is a share of ownership in a company, this is why Stocks are also called Shares. The movement in stock prices is determined by the last executed trade between the seller and buyer of the specific stock.
Fundamentally there is no difference between the term “Stock Price” and “Share Price”. In the U.S.A and Canada the term “stock price” is used. In the UK, India, Europe the term “Share Price” is used. They are both fully interchangeable and mean the same thing, which is the price of a given portion of equity in a publicly listed company.
What is “Last Price” in Stock Market Terminology?
If a stock is currently trading, meaning the stock exchange on which it is being traded is open, then you will see the “Last Price”. This is the price at which the stock last changed hands from seller to buyer. So, if the seller was asking $2.50 for 1 stock and the trade was executed, the “Last Price” is $2.50.
The Last Price changes with every executed trade.
In the US stock markets, prices are quoted in $ US Dollars. So, if you trade the U.S. you will see a stock price of $2.21.
How to Read London Stock Exchange Prices
One important thing to note is this example is from the LSE the London Stock Exchange.
Stock prices here are quoted in Pence. There are of course 100 Pence in a Pound. This “Last Price” is not 221.50 pounds, but 221.50 pence, or approximately 2.21 GBP (Great British Pounds).
What is “Trade Time” in Stock Market Terminology?
The “Trade Time” is the time of day when the last share or stock was traded in the publicly listed company. The trade time can be useful to help you spot a stock that is very thinly traded, meaning it has a lack of liquidity or buyers and sellers. You should avoid shares that have low liquidity because you might have difficulty selling the stock because of a lack of buyers.
Stock Price: What is the Percent Change?
In stock market terminology, the Percent Change or % Change is the difference between the previous trading days closing price and the current price (Last Price). The Percent Change gives you an indication of the increase or decrease in the Stock Price since the previous trading day.
In the example above, we see that British Airways has increased 2.55% since the previous days close.
Stock Price: What is the Previous Close (Prev Close)
The Previous Close is the selling price of a particular share on the last transaction of the previous days trading. Essentially this is the final “Last Price” of the previous days trading.
Stock Price: What is the Open?
Interestingly, the Open Price is the price at which the first share was traded for the current trading day. Here we see that the share price opened at 219.9, but the previous close was 216. This means the stock price gapped up on open by 0.2%. In essence, it is the difference between Open Price and the Previous days Closing Price.
What is the Bid Price?
The Bid Price is the price a buyer bids to buy a stock. The Bid Price is the current market price offered for the stock. This of a stock exchange like an auction, with an Asking Price and a Bidding Price. So if you were to sell the stock now you would get the price you ask as long as the bidder is willing to pay it. The easy way to remember this is “BID TO GET RID”. The BID is the price you would get when you want to get RID of the stock.
What is the Ask Price?
The Ask or Asking Price is the opposite side of the trade to the Bid Price. If you want to buy a stock this is the price that someone else is ASKING for it. The Ask is the current price that it will cost you to buy each stock. An easy way to remember this is “ASK TO BUY”
But why is there a difference? If one person is selling the stock at BID 221.30 and another is buying the Stock at ASK 221.50, there is a difference of 0.2 pence per share (in this case less than 0.1%). This is called the spread.
What is the Stock Price Spread?
In the case of Netflix on the Nasdaq Stock Exchange, lots of shares are traded every day. So the people handling the transaction between the buyers and the sellers have no problem finding matching partners for each transaction. When a stock is traded a lot, it means it is very Liquid or has a lot of Liquidity.
A very liquid stock generally means there is a low BID / ASK Spread. When a stock is very rarely traded and the buyers and sellers cannot agree on a price to make a trade, then the spreads tend to be larger.
Where does this difference in the BID and ASK Price go? The spread is usually the fee for the Market Maker / Broker or Specialist handling the transaction. This is not the same as the Stock Broker Fee, which you will pay per trade to your broker, for example, the $4.99 per trade that goes to TD Ameritrade or other discount brokers.
Large Bid / Ask Spreads Warning
Stocks with a large spread can be a problem. It tells you two important things:
- The stock might not have a lot of liquidity, therefore it may be harder to sell at the price or time you wish to.
- If you do buy a stock with a large spread, for example over 2% of the stock price. This means you would need to make a profit of 2% on the stock just to break even.
So be careful about the spread.
Stock Price: What is the Days Range?
The Day’s Range is the price range within which the stock price moved up or down for the current trading day. For example if Amazon had a highest sell price of $2,200 for the day and the lowest sell price for the day was $2,000, the Days Range would be 10%.
What is the 52 Week Range?
The 52-week range is the value between which the stock price has moved over the last 52 weeks of trading. This is not the last calendar year; this is the previous 52 weeks from today. Investors assume that if a stock is close to its 52 week high it is overbought, conversely if close to the 52 week low it might be undervalued.
What is a Good 52-Week Range?
There is no good 52-week range. Some traders seek to buy stocks at the height of the 52-week range as they expect a pull-back. Other traders buy at the height of the 52-week range expecting a stock price breakout to new highs. A good 52-week range depends on your individual trading or investing style and strategy.
What is Volume in Stocks?
Volume is the actual count of shares/stocks that are traded in a given timeframe. On a daily chart, the volume represents the number of stocks that change hand on that day. High volume and a decrease in stock price is a bearish signal in stock analysis. High volume and an increase in stock price is bullish according to analysts and supply and demand theory.
What is a Good Volume for Stocks?
A good minimum volume for a stock is typically 1 million stocks traded in a given day on average. Good volume means good liquidity meaning that there is enough money to keep the bid-ask spreads tight. This means you can usually sell for the price you want at the time you want. If there is low trading volume and many gaps in stock price bars, this is a warning sign of low volume.
What Does it Mean if a Stock is Liquid?
If a stock is Liquid it means that there is plenty of money lubricating the trading of the stock. For example, if there are many people exchanging the stock every day and money is flowing in and out of the stock, then it is deemed to be highly Liquid. This means a low bid/ask spread and better trading conditions as you can easily liquidate your stocks when you need to.
U.S. Stock Price Example
This the next Stock Price example we use a more recent quote for FaceBook (Ticker:FB) from the NASDAQ Stock Exchange
What is the Previous Close?
This is $164.53 -- this is the last price for the previous trading day. If you look at the stock on a Sunday, the previous close will be at the end of the trading day on a Friday.
What is Stock Price 52 Week High/Low?
This is a useful indicator to show the range of trading in the last year, the Highest and Lowest levels of the stock price.
What is Market Capitalization? (Market Cap)
This is the last price of the Stock multiplied by the number of shares outstanding. For example, if my company has 1 million shares, and the closing price of the stock yesterday was $10. The approximate value (market capitalization) of my business is $10 Million. In this example, Facebook Inc is valued at a crazy $476 Billion Dollars.
What is the PE Ratio? (Price to Earnings Ratio)
The PE Ratio is calculated by dividing the Price per Share by the actual last reporting earning per share. This is a very important measure of the relative pricing of a firm. Read more on the P/E Ratio here.
What is the Ex-Dividend Date, Dividend Payment Date, Current Yield?
As Facebook has not paid a dividend so far these fields are blank. The current yield is the Dividend per share divided by the number of shares. So, if you have 1 share work $10 and the company pays a dividend per share of $1, you will have a dividend yield of 10%
Why do Stock Prices Change?
Stock prices change due to supply and demand pressures from the market participants, according to the following rules
- If Supply is equal to Demand -- Stock Prices Remain the Same
- If Supply is greater than Demand -- Stock Price Drops
- If Demand is greater than Supply -- Stock Price Increases
Why Do Stock Prices Change? Example
Imagine you live in the Caribbean and you own a Pineapple stand at the local market.
During harvesting season you have lots of pineapples to sell, in fact, you have more pineapples than people to buy them This means the supply of pineapples is higher than demand. So, in order to sell all the pineapples and maximize your gross profit, you will reduce your prices to encourage people to buy more.
When the pineapple season is over, people still want pineapples but you have less to sell.
You still want to make a good profit, so you increase the price (Asking Price) of your pineapples. Because there are more people who want pineapples and fewer pineapples available the price will naturally rise as people will bid higher (Bid Price). This means there is more demand than supply.
Why Do Stock Prices Go Up?
Stock prices increase because the people who want to buy a share of that company believe that the company is worth more than the current price. If the number of people who believe the company is worth more than the current price (Demand) outweighs the number of people who believe it is worth less (Supply) then the stock price will rise
If Demand is greater than Supply -- Stock Price Increases
Why Do Stock Prices Go Down?
Stock prices decrease because the people who want to buy a share of that company believe that the company is worth less than the current price. If the number of people who believe the company is worth less than the current price (Demand) outweighs the number of people who believe it is worth more (Supply) then the stock price will rise. Meaning they are more seller than buyers
If Supply is greater than Demand -- Stock Price Drops
What Determines a Stock Price?
What determines a stock price in the short term:
On any given trading day a stock’s price is determined by what it sells for. This means when a sale is completed that is the LAST PRICE the stock was sold for. The next price of the stock will be what it sells for in the next transaction either the bid price or the Ask price.
What determines a stock price in the long term:
The direction of a stock price’s movement over the long term is how well the company is doing. If a company is making great profits, paying dividends or has a stellar future (and the market participants believe it) the stock price will rise.
If the company has a poor financial performance, lowering profits, poor products, the company will be deemed by the shareholders to be worthless, therefore sell the shares and the price will drop.
Stock Price: Summary
So what is in a stock price? Quite a lot actually. Remember 3 things:
- BID to get RID (the price you will get when you sell a stock)
- ASK to BUY (the price you will pay when you buy a stock)
- Be careful of large stock price spreads as this can means there is not a liquid market with enough buyers and sellers.
- The Price Earning Ratio helps you judge the relative value of a stock compared to its pier in the same industry.
- The Spread is the difference between the bid and ask, this is quite often what the market maker or market making system will earn to facilitate the trade.
- Stock Prices move because the equilibrium between demand and supply (buying and selling) is unbalanced.
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