Section 8.4 – Quotes, Bids, Asks, and the Spread

  • Before placing a trade, investors look for a quote — the current pricing information for a security.

  • 🐂 Bulls vs. 🐻 Bears

    • Bull → Investor who believes the market (or a specific stock) will go up.

      • Buying (“going long”) = bullish.

    • Bear → Investor who believes the market (or a specific stock) will go down.

      • Selling short (“shorting”) = bearish.

💬 Understanding a Quote:

  • A quote shows two prices:

    • Bid – Highest price a buyer is willing to pay.

    • Ask (Offer) – Lowest price a seller is willing to accept.

    • Size – Number of shares available at each price, quoted in round lots (100 shares).

    Example:

BCO Ask 42.50, Size 12
Means there are 1,200 shares available for sale at $42.50 per share.

  • Bid Price: What the seller receives. (“I want to buy this stock at this price.”)

  • Ask Price: What the buyer pays. (“I’ll sell this stock at this price.”)

🔹 The Spread = Ask Price – Bid Price
It represents the market maker’s profit margin between buying and selling.

💹 How Orders Execute:

  • Market Order to Buy: Executes at the Ask price (the lowest current sell offer).

  • Market Order to Sell: Executes at the Bid price (the highest current buy offer).

  • Bid is always less than the Ask.

🧾 How Quotes Are Formed (Exchange Market Example)

  • Quotes on exchanges (like the NYSE) are maintained by the Designated Market Maker (DMM).

  • The DMM keeps an order book showing all open limit orders (orders to buy/sell at specific prices).

Example of DMM Order Book for BCO:

Share / Type / Price

  • 200 / Sell Limit / 43.00

  • 100 / Sell Limit / 42.75

  • 400 / Sell Limit / 42.50

  • 800 / Sell Limit / 42.50

  • 1,000 / Buy Limit / 42.00

  • 300 / Buy Limit / 41.75

  • 1,500 / Buy Limit / 41.50

  • 100 / Buy Limit / 41.25

  • Highest Buy Limit (Bid): 42.00 → size 10 (1,000 shares)

  • Lowest Sell Limit (Ask): 42.50 → size 12 (1,200 shares)

  1. 🟩 Current Quote: Bid 42 / Ask 42.50 / Size 10 × 12

    ➡️ Market order to buy executes at 42.50
    ➡️ Market order to sell executes at 42.00

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🏦 OTC Market Quotes:

  • In the OTC market, quotes are set by broker-dealers acting as market makers.

    1. Market makers buy at the bid and sell at the ask.

    2. Customers always:

      • Sell to the dealer at the bid, and

      • Buy from the dealer at the ask.

Example (OTC – XYZ Corp):

Market Maker / Bid / Ask / Size (x100)

  • A / 15.00 / 15.25 / 15 × 20

  • B / 15.20 / 15.27 / 5 × 8

  • C / 15.15 / 15.22 / 5 × 12

  • ➡️ Highest Bid = 15.20 (500 shares)

  • ➡️ Lowest Ask = 15.22 (1,200 shares)

  • ✅ Current Quote for XYZ Corp: Bid 15.20 / Ask 15.22 / Size 5 × 12

💵 Bond Quotes

  • Bonds also trade OTC, and their quotes are expressed as a percentage of par value (par = $1,000).

  • Terms like “quoted at,” “currently trading,” or “current market value (CMV)” all refer to the current price of a security.

Next Section

✺ Review questions ✺

  • A bull expects prices to rise; a bear expects prices to fall.

  • Bid (buy price) and Ask (offer) (sell price).

  • The number of shares available at the bid or ask, expressed in round lots of 100 shares.

  • $0.50

  • The Designated Market Maker (DMM).

  • The Ask price.

  • The Bid price.

  • Market Makers (Broker-Dealers).

  • The Ask.

  • As a percentage of par value ($1,000).