the bid and ask price

The bid and ask price are very important to understand in the stock market. They are the prices you can buy and sell stocks and options at.

The Ask price is the price that you would pay in order to get into a trade. This is especially true with options. This price is always higher what the stock or option is actually worth or trading at.

The Bid is the price that you would sell at in order to get out of a trade. This price is always higher than what the stock or option is worth or trading at.

If you are just buying the stock these prices do not matter as much to you because there is a price in the middle called the market price that you can buy or sell at.

For option buyers and sellers however these terms are very important to understand. There is no market value on options, so you must buy or sell the options at the bid or the ask.

For example If you buy an option with an ask of $8.7 and a bid of $8.5 you have to buy it at $8.7. If you were to sell it right away you would sell it for $8.5. In other words you would lose $.20 the second you bought it.

There are a few ways to deal with this problem. The first is setting a market order. With this order you can ask to get filled at say $8.6. Or right in the middle of the prices. If you get filled here then you could get rid of the loss you would experience once you bought this option.

The downside to doing this is that there is a chance you will not get filled. You may not actually buy or sell the option for the stock, which is what you wanted to do in the first place. This is why many traders will choose to just pay the extra price.

You may also want to consider that the more frequently an option is traded the more likely it is that you will be able to get filled in between prices. There are places that will tell you how often options are traded, but the easiest way to tell if an option is in demand is by looking at 2 different things.

1. How often is the stock traded? The more popular the stock the more popular the options. Big name stocks are traded much more then stocks no one has heard of.

2. Where is the strike price of the option? Options with a strike price far out of the money are likely not to be traded as frequently. In the money and at the money options are traded much more often.

The other thing you should consider is not trading options with a large gap between prices. In the example above we could buy the option for $8.7 and/or sell it for $8.5. Some stock options will actually have a very wide gap. Maybe you can buy it at $9 and/or sell it at $6. It may be wise to stay away from these options.