When I buy a stock, should I track the bid price?

If I bought a share for \$1000 (bid: \$996, ask: \$1000) and I want to take a profit of \$20, should the stock price move up by 2% (20/1000) or 2.4% (20/1000 + 4/1000)?

The current quote is \$996 x \$1000

The bid represents the highest price someone is willing to pay (\$996)

The ask price is the lowest price someone is willing to sell at (\$1,000)

As a buyer at the current price, you will pay \$1,000

If you want to make \$20, your sale price must be \$1,020. That means that the bid price must rise 2.41% (24/996) in order for your trade to execute. The subsequent ask price is irrelevant to this.

The ask price is the price the stock is sold at, and the bid price is the price people are willing to buy it for. So when you bought the stock for \$1000, and you want to sell it for \$1020, then that would happen as soon as the bid price is \$1020. However, the bid-ask spread is not a constant. So when the bid price is \$1020, then the ask price is not necessarily \$1024.

However, you actually don't need to be concerned with this, because when you want to sell that stock as soon as you can get \$1020 for it, you can simply post a limit order for \$1020. Your broker will then sell your stock when the bid-price rises to \$1020.

• "The ask price is the price the stock is sold at, and the bid price is the price people are willing to buy it for" Well, more precisely, the ask price is the price people are willing to sell it for, exactly the opposite of a bid. – Michael May 12 at 18:32

I thought it might be fun to add more detail on how a trade happens. I used to work as a programmer for day traders, and that was a wonderful crash course on how markets work on the second-to-second level.

At its core, a market is a set of buyers and sellers seeking to make trades with each other, and they declare their intentions by making bids (an offer to buy an amount of something at a particular price) and asks (an offer to sell an amount of something at a particular price).

Modern computerized markets simultaneously track all current bids and asks for a stock. They even sell this data to brokers and traders via subscriptions. At a level 1 subscription, you will see the price and size of the highest bid and lowest ask. At a level 2 subscription, they will let you see some of the lower bids and higher asks so you can see how "deep" the market goes, but this is only for very advanced traders.

A trade happens during a "cross," when a bid and ask match or exceed each other; the sale will happen at the price of the first offer. The price of that trade then becomes the stock's "last sale price," which is the price you see and hear everywhere when anyone talks about the stock's "price." This is an important distinction—the stock's price is only a reference point, a useful way to talk about the stock's value. It doesn't necessarily tell you what to expect when you place an offer. For a frequently-traded stock, the last price will track closely to the bid/ask, but a rarely-traded stock can have its bid and ask move away from the last sale price.

So ultimately what you're asking for is for the bid, not the stock price, to rise up to your ask, and as Bob Baerker (funny) said, that is asking for the highest bid to increase 2.41%.

Markets provide all sorts of options for how this is to be done. Typical order types include:

• Market order—Buy or sell immediately at the best price. So if you're buying, you will buy at the best ask price. If the trader offering the best ask price is not offering enough shares to fulfill your order, some of your shares will be bought at higher prices. It can also happen that there is no ask or not enough shares on offer, in which case a buy market order could fail.
• Limit order—Buy or sell at a given price or better. This is essentially placing a direct bid or ask into the market and waiting to see when, or if, someone will come to your price. Limit orders typically last until the end of the market day.
• Stop order—Sort of the opposite of a limit order, you're asking to wait until the bid/ask passes through a price, and then execute a trade. This is typically used for sell orders. Where a limit order would normally be placed out of reach of the current offers (that is, you would place an ask at or above the current bid price), a stop would be placed behind them (that is, an ask below the current bid price). Normally this would cause you to execute immediately, but the stop order waits until the price has dropped (or risen) to that level, and then enters a market order. You would usually do this to limit your loss on a stock that is moving wildly—you would buy at a certain level, but enter a stop order to sell if the price drops past your comfort level.

Fancy brokers will offer even more options, such as execution algorithms which automatically enter and remove offers in order to hide your intentions (the market will notice if you make an offer for 10,000 shares in one go) and at the same time try to get you a good price on your trade.

For even more detail, see How do exchanges match limit orders? here on StackExchange.

• What's funny about Bob Baerker? – Flux May 13 at 14:54
• Bob Barker was the classic host of "The Price is Right." I assume that's why he picked the name; if it's his real name, then I apologize! – fluggo May 13 at 15:58
• I was going to use my real name Carnival Barker but I didn't think that I'd be taken seriously so I went with an alias ;->) – Bob Baerker May 13 at 16:57