Why bid and ask do not match the price at which the stock is being traded [duplicate]
"Assuming that no one else has hit the ask, and the asks are still there, yes, you will fill $54.55 as long as you didn't exhaust that ask. Actually, there is no ""current price at which the stock is exchanging hands""; in reality, it is ""the last price traded"". The somebody who negotiated prices between buyers & sellers is the exchange through their handling of bids & asks.  The real negotiation comes between bids & asks, and if they meet or cross, a trade occurs. It's not that both bid & ask should be $54.55, it's that they were. To answer the title, the reasons why the bid and ask (even their midpoint) move away from the last price are largely unknown, but at least for the market makers, if their sell inventory is going away (people are buying heavily and they're running out of inventory) they will start to hike up their asks a lot and their bids a little because market makers try to stay market neutral, having no opinion on whether an asset will rise or fall, so with stocks, that means having a balanced inventory of longs & shorts.  They want to (sometimes have to depending on the exchange) accommodate the buying pressure, but they don't want to lose money, so they simply raise the ask and then raise the bid as people hit their asks since their average cost basis has risen. In fact (yahoo finance is great about showing this), there's rarely 1 bid and 1 ask.  Take a look at BAC's limit book: http://finance.yahoo.com/q/ecn?s=BAC+Order+Book You can see that there are many bids and many asks.  If one ask is exhausted, the next in line is now the highest.  The market maker who just sold at X will certainly step over the highest bid to bid at X*0.9 to get an 11% return on investment."
All the time. For high volume stocks, it may be tough to see exactly what's going on, e.g. the bid/ask may be moving faster than your connection to the broker can show you.  What I've observed is with options. The volume on some options is measured in the 10's or 100's of contracts in a day. I'll see a case where it's $1.80/$2.00 bid/ask, and by offering $1.90 will often see a fill at that price. Since I may be the only trade on that option in the 15 minute period and note that the stock wasn't moving more than a penny during that time, I know that it was my order that managed to fill between the bid/ask. "What you need to do is go to yahoo finance and look at different stock's P/E ratios. You'll quickly see that the stocks can be sorted by this number. It would be an interesting exercise to get an idea of why P/E isn't a fixed number, how certain industries cluster around a certain number, but even this isn't precise. But, it will give you an idea as to why your question has no answer. ""Annual earnings are $1. What is the share price?"" ""Question has no answer""" "Firstly, if a stock costs $50 this second, the bid/ask would have to be 49/50.  If the bid/ask were 49/51, the stock would cost $51 this second.  What you're likely referring to is the last trade, not the cost.  The last trading price is history and doesn't apply to future transactions. To make it simple, let's define a simple order book.  Say there is a bid to buy 100 at $49, 200 at $48, 500 at $47.  If you place a market order to sell 100 shares, it should all get filled at $49.  If you had placed a market order to sell 200 shares instead, half should get filled at $49 and half at $48.  This is, of course, assuming no one else places an order before you get yours submitted.  If someone beats you to the 100 share lot, then your order could get filled at lower than what you thought you'd get.  If your internet connection is slow or there is a lot of latency in the data from the exchange, then things like this could happen.  Also, there are many ECNs in addition to the exchanges which may have different order books.  There are also trades which, for some reason, get delayed and show up later in the ""time and sales"" window. But to answer the question of why someone would want to sell low... the only reason I could think is they desire to drive the price down." "Why would people sell below the current price, and not within the range of the bid/ask? There are many scenarios where this is deliberate but all of them boil down to the fact that the top level's bid doesn't support the quantity you're trying to sell (or is otherwise bogus[1]). One scenario as an example: You're day-trading both sides but at the end of the day you accumulated a rather substantial long position in a stock.  You don't want to (or aren't allowed to[2]) be exposed overnight, however.  What do you do? You place an order that is highly likely to go through altogether.  There's several ways to achieve that but a very simple one is to look at the minimum bid level for which the bid side is willing to take all of your shares, then place a limit order for the total quantity at that price.  If your position doesn't fit into the top level bid that price will well be lower than the ""current"" bid. Footnotes: [1] Keyword: quote stuffing [2] Keyword: overnight margin (aka positional margin, as opposed to intraday margin), this is highly broker dependent, exchanges don't usually distinguish between intraday and overnight margins, instead they use the collective term maintenance margin" Bid and ask prices are the reigning highest buy price and lowest sell price in the market which doesn't mean one must only buy/sell at thise prices. That said one can buy/sell at whatever price they so wish although doing it at any other price than the bid/ask is usually harder as other market participants will gravitate to the reigning bid/ask price. So in theory you can buy at ask and sell at bid, whether or not your order will be filled is another matter altogether. Yes, but also note each exchange have rules that states various conditions when the market maker can enlarge the bid-ask (e.g. for situations such as freely falling markets, etc.) and when the market makers need to give a normal bid-ask. In normal markets, the bid-asks are usually within exchange dictated bounds.  MM's price spread can be larger than bid-ask spread only when there are multiple market makers and different market makers are providing different bid-asks. As long as the MM under question gives bid and ask within exchange's rules, it can be fine. These are usually rare situations. One advice: please carefully check the time-stamps. I have seen many occasions when tick data time-stamps between different vendors are mismatched in databases whereas in real life it isn't.  MM's profits not just from spreads, but also from short term mean-reversion (fading). If a large order comes in suddenly, the MM increases the prices in one direction, takes the opposite side, and once the order is done, the prices comes down and the MM off-loads his imbalance at lower prices, etc. "The market price of a stock is based on nothing at all more than what two parties were last willing to transact for it. The stock has a ""bid"" and an ""ask"" each is the value placed by a counterparty. For the sale to occur, one party must meet the other. The stock transacts and that is the price. For a stock to ""go up"" people must be willing to pay more for it. Likewise, for it to ""go down"" people must be willing to accept less for it." "People in this case, are large institutional investors. The ""bid ask"" spread is for ""small traders"" like yourself. It is put out by the so-called specialists (or ""market makers"") and is typically good for hundreds or thousands of shares at a time. Normally, 2 points on a 50 stock is a wide spread, and the market maker will make quite a bit of money on it trading with people like yourself. It's different if a large institution, say Fidelity, wants to sell, say 1 million shares of the stock. Depending on market conditions, it may have trouble finding buyers willing to buy in those amounts anywhere near 50. To ""move"" such a large block of stock, they may have to put the equivalent of K-Mart's old ""Blue Light Special"" on, several points below." The everyday investor buys at the ask and sells at the bid but the market maker does the opposite This is misleading; it has nothing to do with being either an investor or a market maker. It is dependent on the type of order that is submitted. When a market trades at the ask, this means that a buy market order has interacted with a sell limit order at the limit price. When a market trades at the bid, this means that a sell market order has interacted with a buy limit order at the limit price. An ordinary investor can do exactly the same as a market maker and submit limit orders. Furthermore, they can sit on both sides of the bid and ask exactly as a market maker does. In the days before high frequency trading this was quite common (an example being Daytek, whose traders were notorious for stepping in front of the designated market maker's bid/ask on the Island ECN). An order executes ONLY when both bid and ask meet. (bid = ask) This is completely incorrect. A transaction occurs when an active (marketable) order is matched with a passive (limit book) order. If the passive order is a sell limit then the trade has occurred at the ask, and if it is a buy limit the trade has occurred at the bid. The active orders are not bids and asks. The only exception to this would be if the bid and ask have become crossed. When a seller steps in, he does so with an ask that's lower than the stock's current ask Almost correct; he does so with an order that's lower than the stock's current ask. If it's a marketable order it will fill the front queued best bid, and if it's a limit order his becomes the new ask price. A trade does not need to occur at this price for it to become the ask. This is wrong, market makers are the opposite party to you so the prices are the other way around for them. This is wrong. There is no distinction between the market maker and yourself or any other member of the public (beside the fact that designated market makers on some exchanges are obliged to post both a bid and ask at all times). You can open an account with any broker and do exactly the same as a market maker does (although with nothing like the speed that a high frequency market-making firm can, hence likely making you uncompetitive in this arena). The prices a market maker sees and the types of orders that they are able to use to realize them are exactly the same as for any other trader. Because in the case for 100/101, if you wanted to placed a limit buy order at top of the bid list you would place it at 101 and get filled straight away. If placing a limit buy order at the top of 91 (for 90/98) you would not get filled but just be placed at the top of the list. You might get filled at a lower price if an ask comes in matching your bid, however you might never get filled. In regards to market orders, with the 100/101 being more liquid, if your market order is larger than the orders at 101, then the remainder of your order should still get filled at only a slightly higher price. In regards to market orders with the 90/98, being less liquid, it is likely that only part of your order gets filled, and any remained either doesn't get filled or gets filled at a much higher price. The point is that the bid and ask prices dictate what you can buy and sell at (at market, at least), and the difference between the two, or spread, contributes implicitly to your gains or losses. For example, say your $1 stock actually had a bid of $0.90 and an ask of $1.10; i.e. say that $1 was the last price. You would have to buy the stock at the ask price of $1.10, but now you can only sell that stock at the bid price of $0.90. Thus, you would need to make at least that $0.20 spread before you can make a profit. In the world of stock exchanges, the result depends on the market state of the traded stock. There are two possibilities, (a) a trade occurs or (b) no trade occurs. During the so-called auction phase, bid and ask prices may overlap, actually they usually do. During an open market, when bid and ask match, trades occur. yes you are right as per my understanding while doing trade you must consider fol (specially for starters like me) The volume of the stock you are trading in should be high enough to keep you secure for quick in and out Whenever the bid volume is more than the ask volume the prices will move up and vice versa. to give an example if a stock is at 100 points and there are fol bids: The transaction will occur when either the bidder agrees to pay the ask price (case 1. he pays 101 . his bid offer will disappear and the next best ask will be 102. and the current price will be 101 which was the last transaction.) or when the person giving ask price agrees to deal at best bid which was 99 in which case the share will go down. When a stock is going to become public there's a level of analysis required to figure out the range of IPO price that makes sense. For a company that's somewhat mature, and has a sector to compare it to, you can come up with a range that would be pretty close. For the recent linkedin, it's tougher to price a somewhat unique company, running at a loss, in a market rich with cash looking for the next great deal. If one gives this any thought, an opening price that's so far above the IPO price represents a failure of the underwriters to price it correctly. It means the original owners just sold theirvshares for far less than the market thought they were worth on day one. The day of IPO the stock opens similar to how any stock would open at 9:30, there are bids and asks and a price at which supply (the ask) and demand (bid) balance. For this IPO, it would appear that there were enough buyers to push the price to twice the anticipated open and it's maintained that level since.  It's possible to have a different system in which a Dutch auction is used to make the shares public, in theory this can work, it's just not used commonly. A stock's price does not move in a completely continuous fashion.  It moves in discrete steps depending on who is buying/selling at given prices. I'm guessing that by opening bell the price for buying/selling a particular stock has changed based on information obtained overnight. A company's stock closes at $40.  Overnight, news breaks that the company's top selling product has a massive defect.  The next morning the market opens.  Are there any buyers of the stock at $40?  Probably not.  The first trade of the stock takes place at $30 and is thus, not the same as the previous day's close.