What it is:
How it works/Example:
The left-hand side of a quote represents the highest a person is willing to pay for the security at that time. The difference between the left-hand side and the right-hand side (the ask) is called the spread.
Typically, a trader or specialist on the floor of the New York Stock Exchange would quote the bid-ask spread as follows:
Note that online trading systems might refer to the bid-ask spread as “BxA” rather than left-hand or right-hand.
There may be several bid prices and several ask prices for a security at any point in time. However, only the best bid (that is, the highest left-hand side) and the best ask (that is, the lowest right-hand side) are used to calculate the bid-ask spread.
Why it matters:
It is important to remember one key aspect of bid and ask prices: Purchasers pay the right-hand side and sellers receive the left-hand side. This nuance is why securities dealers make a profit on bid-ask spreads: Their job is to buy stocks at the ask price and sell at the bid price.
Many traders and analysts scrutinize patterns in bid-ask spreads to understand what prices trigger demand for both sellers and buyers. Other traders and analysts feel that the bid-ask spread itself has little predictive value.