WHAT IT IS:
The bid price is the highest price that a prospective buyer is willing to pay for a specific security. The "ask price," is the lowest price acceptable to a prospective seller of the same security. The highest bid and lowest offer are quoted on most major exchanges, and the difference between the two prices is called the "bid-ask spread."
HOW IT WORKS (EXAMPLE):
Unlike shopping for groceries, in the stock market the buyer also has a say in what price they will pay for a security. The price set by the buyer is the bid price.
When an investor decides he wants to buy a security, he doesn't have to buy it at market price; instead he can use a "limit order" to specify to his broker that he wants to buy the security, as long as it's under a certain price.
For example, shares of Company XYZ have been trading between $20 and $25 throughout the day. George is interested in buying share of XYZ, but he doesn't want to buy them for more than $22. When he talks to his broker, George tells him that he wants to set a "limit order" for 100 shares at $22. Because he's indicated a "bid price," George's broker will only execute the trade at (or below) that price.
Limit Order
WHAT IT IS:
Limit order allows you to set a price at which you want to buy or sell a stock unlike market order , your purchase or sale will go through only when the price reaches the level that you specify.(A market order is an order to trade a stock at the current market price.)
HOW IT WORKS (EXAMPLE):
For example, you want to buy ABC Inc. at $50. The stock is currently trading at $51, so you set a limit order to buy at $50. The price may go up or it may go down, but you know that as soon the stock trades at $50, your order will be triggered and you'll buy at your predetermined price.
Once you buy ABC at $50, let's say you decide you want to sell at $53. Again, you place your limit order and wait. Once ABC trades at $53, your order becomes active and will sell at your target price of $53.
Limit orders are especially useful in volatile market environments. If a $50 stock trades between $50 and $60 on a volatile day, investors using market orders will be at a decided disadvantage because they won't have control over the price at which they buy or sell.
WHY IT MATTERS:
By using limit orders, you can protect yourself from buying a stock at too high a price or selling at too low a price
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