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As sellers offer their shares to the market they ask buyers for a certain price for each share. This is known as the ask price. Buyers in turn offer their bids to buy the shares. This is known as the bid price. You may think with so much activity going on in the market, the bid and ask prices must fluctuate constantly. They do. Continued buying and selling of stocks guarantees a dynamic and ever-changing stock prices in the market, and again all of it is driven by the old rule of supply and demand. As the demand for a certain stock rises, so does its price. The price continues to climb until it finds a stable point where supply and demand come to an equilibrium. As soon as there is disturbance in supply or demand, the price starts to move again until the next stable point is reached. This activity continues throughout the day until the market closes and the last price of the stock for that day is reported as the closing price.

Okay, back to bid and ask. As you may suspect, the ask price is always higher than the bid price. Sellers try to get the most money for their shares whereas buyers try to get the shares at a cheap price. They would have to meet halfway in order for a transaction to take place. The difference between the ask and the bid price is known as spread. The lower the spread, the more likely a transaction would take place. The price at which the transaction takes place would be the price of the stock at that moment. That is the price you see on your Web browser or on the ticker tape on TV, and as you know, for high volume stocks the price changes continuously. So why is there always a difference between the ask and bid prices? Two reasons. First, sellers always ask for a higher price than the bidders are willing to pay. So as soon as a transaction takes place at a certain price, sellers move up the ask price while buyers move down the bid price by a notch. Second, the middlemen (dealers, market specialists, and market makers) try to take a cut out of every share, so if someone is offering shares for sale, the particular dealer …