Skip to main content
Message Font: Serif | Sans-Serif
No. of Recommendations: 0
Hi lwidema:

"My questions are: How are the bid and ask prices established? and Why so some stocks have bid & ask prices while others do not?"

Bid & ask prices are determined by the NASDAQ dealer that makes a market for that particular stock. A NASDAQ market functions similar to a store. The dealer is the owner and keeps an inventory of those stocks in which he or she deals.

The dealer earns a living off the spread between the ask & bid prices. If the dealer doesn't like what you are willing to pay for the stock, the dealer doesn't have to sell. However, since the dealer has funds tied up in the stock inventory, the dealer will sooner or later be motivated to sell at a lower price.

Now, if the stock is being bought/sold on an exchange floor such as the NY Stock Exchange, a trader will perform the transaction. The trader does not purchase the stock from you, the person only acts as your agent for a fee, i.e. commision. As a result, there won't be an ask or bid price, the only price quoted will be the last transaction. The reason is that you determine at what price the transaction will ocurr.

Also, the stock exchange will have a main trader working for one of its member firms that is called a market maker. The role of this person is to maintain an orderly maket for a group of stocks. In order to keep the goods flowing, the market maker will buy or sell from the firm's account. The rules require that this person do this regardless of the market conditions, but this doesn't always happen such as during the October, 1997 market crash. Lately, however, the market makers have been stepping in.

Anyway, a good point to remember is that there are two main financial market mechanisms: NASDAQ and Stock Exchanges. They both have different processes.

I hope this helps.

Print the post  


What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and Glassdoor #1 Company to Work For 2015! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.