Understanding Quoted Prices: A Comprehensive Guide

The quoted price is the most recent – or last – price at which a financial assetFinancial AssetsFinancial assets refer to assets that arise from contractual agreements on future cash flows or from owning equity instruments of another entity. A key such as stock, bond or commodity, has traded. The quoted prices for all investments change throughout each trading day in response to the volume of buy and sell orders entered by investors as their perception of the investment’s value changes.

Summary

• Quoted price is the most recent – or last – price at which a financial asset such as stock, bond, or commodity, has traded.
• It represents the latest collective assessment of an investment’s value as reflected in the current bid and ask prices.
• Spread is defined as the difference between the current bid and ask prices and is an important indicator of how liquid an investment is and, therefore, how relatively easy or difficult it will be for an investor to buy or sell it at a desired, favorable price.

Understanding Quoted Prices

The current quoted price of a publicly-traded stock may represent the latest bid price or offer price. The bid price refers to the current highest price that someone is willing to pay for the stock, while the offer price is the current lowest price at which someone who already owns the stock is willing to sell it.

For the quoted price to be of any use to an investor, they must understand how the pricing of a traded financial asset is expressed. Stock price quotes are straightforward, typically expressed in dollars and cents.

However, bond prices in the U.S. and several other countries are commonly quoted in terms of dollars and fractions of a dollar, divided not into cents but into 32nds of a dollar.

For example, a bond price quoted as 105.12 translates to a price of $105.375 (12/32 of a dollar = 0.375 cents) for each $100 worth of face value (also referred to as par valuePar ValuePar Value is the nominal or face value of a bond, or stock, or coupon as indicated on a bond or stock certificate. It is a static value) of the bond. Therefore, the total purchase price of a bond with a face value of $1,000, quoted at 105.12, is $1,053.75 ($105.375 times 10 = $1,053.75).

Why Bid and Ask Prices Matter

Spread is defined as the difference between the bid and ask prices. It is a good indicator of how liquid trading in the stock is. A stock that attracts many interested investors, whether they are looking to buy long the stock or sell short, and therefore, with a high volume of trading, making it a very liquid investment, typically shows a very narrow spread between the bid and ask prices.

In contrast, stocks that are thinly traded and with low liquidityLiquidityIn financial markets, liquidity refers to how quickly an investment can be sold without negatively impacting its price. The more liquid an investment is, the more quickly it can be sold (and vice versa), and the easier it is to sell it for fair value. All else being equal, more liquid assets trade at a premium and illiquid assets trade at a discount. may have a wide disparity between the bid and ask prices.

Liquidity is important for investors because it directly impacts their ability to buy or sell stock at a desired, favorable price and ultimately affects their bottom-line investment profits.

For example, the bid and ask spread on a very widely traded stock such as Apple (NASDAQ: AAPL) may be very narrow, with perhaps the bid price at $90.61 and the ask price at $90.62. With such a narrow bid-ask, the losses that result from having to buy at the higher ask price and sell at the lower bid price are negligible.

However, imagine a thinly traded stock with a very wide bid-ask spread, perhaps as much as $1.00 – for example, a bid price at $90 and the ask price at $91. Under such conditions, a buyer of the stock will incur a $1.00 per share loss buying in at the higher ask price and then suffer another $1.00 per share loss when they go to sell the stock, when they have to accept the lower bid price.

The loss that occurs as the result of the bid-ask spread differential is referred to as “slippageSlippageSlippage occurs when the execution price of a trade is different from its requested price. This occurs when the market orders could not be.” In our example, the total amount of slippage incurred in buying and selling the stock equals $2.00 per share. If the stock buyer is trading 10,000 shares at a time, that adds up to a total of $20,000.

What the Quoted Price Does Not Tell You

The current quoted price of a stock or other investment asset reflects, in the current bid and ask prices, the collective perception of the asset’s value among all investors seeking to buy or sell the asset. However, the simple price quote information is limited in terms of how helpful it is to investors trying to assess whether the asset is a good buy or a good sell.

Consider the following brief list of things that the quoted price fails to tell you about a financial asset:

1. The quoted price does not reveal the relative levels of supply and demand for the asset.

For example, there may be orders to buy a total of 100,000 shares of stock at the current bid price, while there are only orders totaling 25,000 shares being offered for sale at the ask price.

Because there are considerably more buyers seeking to acquire the stock at the quoted price than there are sellers willing to sell it, it is likely that the buying demand pressure will push the stock’s price higher until it reaches a price level where there is an approximate balance of buyers and sellers.

2. The quoted price does not tell you who the current buyers and sellers are.

It does not reveal whether large institutional traders or company insiders are buying or selling the stock in significant quantities.

3. The currently quoted price does not reveal whether there are sizable limit price orders or buy or sell stop orders close to the quoted price.

Suppose a stock is currently trading at $49 a share and there is a large amount of buy-stop orders at $50 a share (it means that many investors want to buy the stock if it reaches the $50 a share level because they then expect the stock to rise substantially higher).

If the stock does subsequently trade at the $50 level, the triggering of all the buy-stop orders may quickly drive the stock price sharply higher. An investor looking to buy the stock may want to go ahead and buy in before it happens, so that they can acquire shares for less than $50 a share rather than risk having to pay $53 or $54 a share after a quick price jump to the upside.

Related Readings

CFI offers the Capital Markets & Securities Analyst (CMSA)®Program Page - CMSAEnroll in CFI's CMSA® program and become a certified Capital Markets &Securities Analyst. Advance your career with our certification programs and courses. certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following resources will be helpful:

• Bid and AskBid and AskThe term bid and ask refers to the best potential price that buyers and sellers in the marketplace are willing to transact at.
• Bond PricingBond PricingBond pricing is the science of calculating a bond's issue price based on the coupon, par value, yield and term to maturity. Bond pricing allows investors
• Commodity Linked SecuritiesCommodity Linked SecuritiesCommodity linked securities are investment instruments or securities that are linked to one or more commodity prices. Unlike commodities, which provide no income to the owner, commodity linked securities usually give some payout to holders.
• Volume of TradeVolume of TradeVolume of trade, also known as trading volume, refers to the quantity of shares or contracts that belong to a given security traded on a daily basis