A bidder in the stock market is very similar to a bidder at an auction. You have definitely witnessed an art auction/bid as part of a movie or series, if not in person. An artwork or piece of jewelry or some other expensive item is displayed and attendees state how much they are willing to pay to make the prized possession their own. In an art auction, you will probably have noticed that most of the bidders are wealthy individuals.
This need not be so for a stock market bidder (he or she need not own a Monet or several million worth in precious gems). However, the meaning of bidder, and its overall essence and implications remain the same.
What is a bidder in stock market terms?
A bidder, as far as the stock market term goes, is simply a trader who offers to buy shares or futures or options or any other security from the owner of the given security at a certain price. Just like in an art auction – and obviously so – the seller will choose to sell to the bidder who is offering him the highest price for the security.
Role of stock market bidders:
Bidders have a key role to play in making the stock market move and tick. You might say that bidders pretty much set the tone for what direction the market will take. When bidders state their prices, or more precisely, when bidders state the price that they are willing to pay for a security, a higher price might indicate that they anticipate high market demand. This might draw a higher number of sellers wanting to sell their securities because of the opportunity to sell at a higher price.
Bid and ask – two sides of the same coin:
Bidders state their bid prices, but will only be able to actually purchase the shares if a seller on the stock market is willing to sell at the highest price being offered by the bidders. Meanwhile, sellers too, state a price that they are willing to sell at, and this is known as the ask price.
How a bidder functions:
As you may have guessed from bidder’s meaning, this type of trader makes a price prediction, and makes a bid based on his price prediction.
The bidder then places an order with their broker. Nowadays people use online brokers like Angel One (previously Angel Broking) which can be accessed easily and on-the-go via a smartphone app.
The order contains key details like how many shares of the said company the bidder intends to buy and the price that he or she is willing to pay.
Typically, the broker then makes the offer on the stock exchange on behalf of the trader/bidder.
This is when the concept of ask price comes in. On the other side of the proverbial fence, sellers similarly state the number of shares that they are keen to sell and the price that they intend to sell at. That price is known as the ask.
If a bid and an ask match, a sale goes through.
Chief considerations for the average bidder
A bidder makes his or her bid based on informed predictions on which way the market will progress. For example, imagine a scenario where shares of Company X are trading at a bid price of Rs 100 and an Ask price of Rs 120. If Rohan, a stock market bidder, wants to bid and buy the shares for Rs 120, he will usually do so because he predicts that Company X’s share price will increase to more than Rs 120. In fact, considering that he will be investing time and capital spent on fees and charges to his broker (and any other spends), not to mention accepting stock market risk, Rohan might want the price to increase by a good bit. He might, for example, have a target price of Rs 240 or even Rs 300.
All goes well for Rohan if stock prices do play our in this manner. But the list of variables is long and could impact Rohan’s potential earnings.
A bidder has no idea how long the stock price will take to reach his target price. If the stock price takes very long to reach the target price, the bidder’s capital might have been better invested where returns would be delivered at a quicker pace.
The bidder makes his bid – or agrees to an ask price – based on a prediction that is hinged on historical pricing data, company financials and overall market knowledge. However, things could change suddenly and dramatically and the stock price could well move in the opposite direction. In such a scenario, the trader is left holding a stock that he paid a higher price for than the current market price. It may be a while before he is able to sell at even the price he bought at, let alone at a potential profit.
Bidders keep the stock market moving. In order to be a successful bidder, you must be able to make accurate predictions on how stock prices will progress. Bidding – like any stock market move – comes with capital risks and if you intend to bid, sound stock market risk and a reasonably high risk appetite are pre-requisite.