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If a stock has a current ask of €30,-, and I place a bid of €31,-, I assume my order would get matched with the ask order of €30,-. Where does the €1,- difference go? Do I buy the stock for €30,50, does the asker get lucky, the bidder get lucky, or does the €1,- "disappear" into the system (e.g. the broker)?

To answer some questions:

  • For the sake of the question I assume there are no fees involved.
  • Why would I offer more? I could see this happen in two scenarios:
    1. A very volatile market, in which the price is going up rapidly, if I want to make sure I get the stock.
    2. I place my bid slightly higher than the last bid, and at the same time someone places an ask to match the previous bid. (In this case it'll be a matter of cents instead of €1,-, but I'm assuming the mechanics are the same.)
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    Why would you bid more than the asking price? That's like wanting to pay more than what the auto dealer is selling the car for.
    – RonJohn
    Dec 23 '20 at 20:48
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    I think the answer you have accepted fails to adequately describe the order-filling process, and I suggest you accept Bob Baerker's answer instead. Dec 24 '20 at 8:12
  • @RonJohn Maybe think of it like buying a house -- you might offer more than the asking price to ensure that someone else doesn't get it. But this doesn't usually apply to stocks, unless you're attempting a takeover.
    – Barmar
    Dec 24 '20 at 16:46
  • @Barmar "But this doesn't usually apply to stocks, unless you're attempting a takeover." Exactly, and we're too small to attempt a takeover.
    – RonJohn
    Dec 24 '20 at 17:05
  • @RonJohn, I just added some more explanation to my question. Do keep in mind that it's relatively hypothetical, al though I do expect the case to come up for cents quite regularly. I'm assuming most people won't see nor care because it doesn't happen often enough to have a big impact, but I would like to thoroughly understand what happens, also behind the scenes. Dec 25 '20 at 8:36
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Here's what happens in the U.S. I assume that it's the same where you are and I'll describe it as such.

If you place a limit order to buy fewer shares than the size available at the ask price of €30 then you'll buy shares at €30.

If you place a limit order to buy more shares than the size available at the ask price of €30 then you'll buy some shares at €30 and some additional shares above €30 (if they're available) up to a price of €31. If there are enough additional shares available below €31 then your entire order will be filled.

If you have All Or None orders as we do, then you'll only get a complete fill if there were enough shares available below €31 to fill your order otherwise you'll get nothing.

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    Why only up to a price of $31? If it's a market order won't you keep buying regardless of the price? Did you mean a limit order at $31 in the third paragraph?
    – JBGreen
    Dec 23 '20 at 19:36
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    The OP said €31 so it was indeed a limit order. Thanks for catching the error. Dec 23 '20 at 19:39
  • So if I understand your answer correctly the buyer always gets lucky, and can get his stocks cheaper than the given bid? It's never the case that the seller can get them for more than his ask? Or does it depend on who comes first? Dec 25 '20 at 8:34
  • The phrase "cheaper than the given bid" could be confusing because it can be taken two ways (1) your order's buy price "bid" or (2) the "bid" price of the current quote. There's no confusion if the "bid" refers to the quote and the "buy price" is used to describe the order. If you place a limit order to buy, it is not an AON order and you are first in line on the order book, you will buy all of the shares available below the buy price in your order (from 30 to 31 in your example). That may or may not add up to the total number of shares that you are trying to buy. Dec 25 '20 at 13:07
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The difference between the buy and ask is called the "spread".

Most bids and asks are matched by computer these days, with the the market makers taking the profit from the spread. Market makers are large trading firms, brokerages, and other entities standing by to always buy or sell certain high-liquidity stocks, thus facilitating the ask and bid (with a spread for profit), almost like a form of arbitrage since the spreads are usually slim when volume is large.

For low-liquidity stocks, there will usually be a larger spread, with the broker profiting from the difference.

The spread is created by the buyers and sellers themselves just by having open orders at the price they want to trade. In other words, the spread happens naturally from open orders waiting to be filled.

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    But how does the match actually work? If I say I will buy for €31 and someone else says they will sell for €30, what's the resulting transaction price? Is it €30 if the ask exists before the bid and €31 if the bid exists before the ask, or does (e.g.) a bid of €31 only come into place if (say) a limit order to buy for up to €31 goes unmatched because there is only an ask for more than €31?
    – chepner
    Dec 23 '20 at 19:27
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    Thanks, that's what I wasn't sure about, whether a bid (ask) was for $X exactly or for $X or less (more).
    – chepner
    Dec 23 '20 at 20:01
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    This doesn't answer the OP's question about what price he will be filled at. Dec 23 '20 at 20:27
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    @DStanley That sounds incorrect. I'm pretty sure BobBaerker's answer is correct. Marketable limit orders are filled like market orders, you run down the order book getting best price available. In your example you would get filled at 30.00, if there's not enough volume, you might get multiple fills at 30, 30.01, 30.02, etc.
    – JBGreen
    Dec 23 '20 at 21:06
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    The spread is the difference between open bid and ask orders when the ask is higher than the bid. OP asked what happens when a bid order is placed that is higher than the current ask. Your answer is not relevant to this situation.
    – Brady Gilg
    Dec 24 '20 at 2:14
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If shares are available at €30, and you offer to pay €31, a good brokerage will settle the sale at €30. They automatically recognize that there is no need for you to overpay €1 when the equity was available for €30.

Thus, you pay €30 and the seller gets €30.

Some brokerages are reportedly better than others at getting the best available price.

Also, some brokerages still charge to buy/sell equities, but these days, most do not.

There's also a small transaction fee, but it's so small they are counting on you not noticing it, or likely not even being aware of it. There is big money in those transaction fees when you add them up for hundreds of millions of transactions.

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  • "a good brokerage" does NOTHING. The orders get sent to the exchange (if not using some OTC only stock) and the EXCHANGE does follow - attention - the law and it's rules, which means it will match with (for buy) lowest price first. The quality of the broker has ZERO to do with this. Has nothign to do with "these days" either.
    – TomTom
    Dec 23 '20 at 22:21
  • "There's also a small transaction fee" - no, there may be not. The OP EXPLICITLY (yeah, if you read what he writes) mentions no fee trading brokerages which DO EXIST. And yes, those mostly work by selling the order flow and getting paid there, and there are shenanigans HFT traders do. PLEASE read up on the basics.
    – TomTom
    Dec 23 '20 at 22:22
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    @TomTom Where did you see OP "explicitly" saying that? I've read the 3 sentences OP posted a few times now and I still haven't been able to find any mention of fees (nor a lack of fees). But, either way, it's always good to mention something that may apply to others with the same question even if not to OP (although in that case the fee "may be" there instead of "is" there).
    – NotThatGuy
    Dec 24 '20 at 12:14
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    I can't speak for the UK but in the U.S. there is a small SEC fee when you sell equities (1% of one eight-hundredth of the dollar value of the equities sold). This fee goes toward the cost of regulating the equities market by the government. This fee has nothing to do with whether the broker charges a commission or not. Dec 24 '20 at 16:23
  • Is there a difference between "1% of one eight-hundredth" and "0.00125%"? Just the wording seems odd.
    – chepner
    Dec 24 '20 at 19:12

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