Level 1 is a service provided by your broker that displays real-time bid, ask and last quote information for stocks. Level 1 is the most basic form of quoting and does not show market depth like Level 2 does.
The bid represents what the buyers are willing to pay for the stock at that specific time and the current ask represents what price the sellers are willing to sell at.
If you place an order to buy on the bid then you are joining all the other buyers there as well and will only get executed on your order if sellers come down to our price. Just because you place an order to buy on the bid doesn’t mean you will get a fill. The same goes for selling.
If you place an order to sell at the ask then you have to wait for a buyer to pay up to your price for you to get executed. If you place a market order to buy then you are saying that you will take the best available price at that moment, which could change if the stock is moving fast and you could get a worse fill than what they expected.
The difference between the bid and ask is known as the spread and depending on how actively traded the stock is will increase or decrease the spread.
For instance, stocks like Bank Of America ($BAC) trade millions of shares a day and have a huge float resulting in the bid/ask being very tight with only one cent spread between the bid and ask whereas a stock like Netflix ($NFLX) has good volume but nowhere near as much as $BAC and can have spreads of 5 to 20 cents depending on the volatility and time of day.
In instances like NFLX, orders can be placed in between the spread making you the highest buyer and lowest seller at that time. So if NFLX is bid $120 by an ask of $120.25, you can place an order to buy at $120.15 and become the highest bidder.
This still doesn’t mean you will get a fill, it just means that you are willing to buy it at a higher price than the other buyers.
Warrior Trading Pro Tip
When placing orders it is important to remember that unless you place a market order, you are not guaranteed a fill. However, if you want to be aggressive without placing a market order, you can place whats called marketable limit order. This is just a normal limit order but you are placing it on the opposite side of the bid or ask.
For instance, if you really like NFLX at the offer price of $120.25 but don’t want to place a market order in case it moves up too much before your order is executed then you can place a buy limit at $120. 30 (just above the ask), which will execute your order all the way up to that price and no further.
This helps out if you are trading with a lot of size and don’t want to get a ton of slippage.