Bid/Ask & Order Types
How the order book works, what the bid-ask spread costs you, and when to use market, limit, stop and stop-limit orders.
Two prices, not one
When you look up a stock you usually see a single price, which is the last trade. But at any moment there are really two prices that matter. The bid is the highest price a buyer is currently willing to pay. The ask (also called the offer) is the lowest price a seller is currently willing to accept.
The difference between them is the bid-ask spread. If the bid is $50.00 and the ask is $50.03, the spread is three cents. Buying at the ask and immediately selling at the bid would lose that spread, so it is a real, if small, cost of trading.
Inside the order book
All the waiting buy and sell orders at different prices form the order book. Buyers stack up on the bid side, sellers on the ask side, with the best prices closest to the middle. When a new order arrives that is willing to trade at the other side’s best price, a trade happens and the book updates.
A simplified order book. The bars show how many shares are waiting at each price.
What makes spreads wide or tight
Heavily traded stocks, like large, well-known companies, typically have spreads of a penny or two because there are always many buyers and sellers. Thinly traded stocks, small companies and extended-hours sessions can have much wider spreads. A wide spread is a hidden cost every time you get in or out, which is one reason many traders focus on liquid stocks with healthy average volume.
Market orders vs. limit orders
A market order says: fill me now at the best available price. It almost always executes immediately, but you do not control the exact price. In a fast-moving or thin stock, you might pay more (or receive less) than the last price you saw. This is called slippage.
A limit order says: fill me only at this price or better. A buy limit at $50.00 will never pay more than $50.00; a sell limit at $55.00 will never sell for less. The trade-off is that if the price never reaches your limit, the order may never fill.
Stop and stop-limit orders
A stop order (often called a stop-loss when used to limit losses) sits dormant until the price reaches your stop price, then becomes a market order. If you own a stock at $50 and set a stop at $46, a trade at or below $46 triggers a market sell. Stops help enforce discipline, but because they turn into market orders, a stock that gaps down overnight can fill well below your stop price.
A stop-limit order becomes a limit order instead of a market order when triggered. It gives you price control, but if the stock falls fast straight through your limit, it may not fill at all and you stay in the losing position.
| Order type | What it does | Main benefit | Main risk |
|---|---|---|---|
| Market | Fills now at best price | Certainty of execution | Slippage |
| Limit | Fills at your price or better | Price control | May not fill |
| Stop (stop-loss) | Becomes market order at stop price | Automatic exit | Can fill below stop on gaps |
| Stop-limit | Becomes limit order at stop price | Price control on exit | May not fill in a fast drop |
The four order types every investor should know.
Time in force
Orders also have a duration. A day order expires at the end of the trading day if it has not filled. A good-til-canceled (GTC) order stays open until it fills or you cancel it, though many brokers put a maximum time limit on GTC orders. Check your broker’s rules before leaving orders working for weeks.
Putting it together
A common approach for a planned trade: enter with a limit order so you do not overpay, then place a stop-loss below a logical level, such as under a recent low or below the base of a chart pattern, so a losing trade stays small. Chart School’s Breakouts category walks through exactly how traders pick those levels.
A worked example
Say a stock shows a bid of $49.98 and an ask of $50.02, and you want 100 shares. A market buy order would likely fill near $50.02, costing about $5,002 before any fees. If instead you place a buy limit at $50.00, you might save a couple of dollars — or the price might rise to $50.40 and leave you unfilled. There is no universally right choice: in a liquid stock with a tight spread, a market order during regular hours usually fills close to the quote; in a thin stock, around news, or in extended hours, a limit order protects you from an ugly surprise.
Key takeaways
- Bid = best price buyers will pay; ask = best price sellers will accept; the gap is the spread.
- Liquid stocks have tight spreads; thin stocks and extended hours often have wide ones.
- Market orders trade instantly but can slip; limit orders control price but may not fill.
- Stop orders become market orders when triggered; stop-limits become limit orders.
- Day orders expire at the close; good-til-canceled orders stay open until filled or canceled.