Companies with the goal to go public on the OTC Markets are ultimately looking for their stock to trade. In the over-the-counter markets, the most basic terms to understand are the “bid” and “ask.”
What is the Bid?
The “bid” is the highest price a Market Maker will pay to purchase a specific number of shares of stock. For instance, on a penny stock, a Market Maker may quote a bid of $0.05 and a size of 10,000, meaning that you can sell up to 10,000 shares to the Market Maker at five cents a share.
What is the Ask?
The “ask” is the lowest price at which a Market Maker will sell a specific number of shares of stock. The ask price is also known as the “offer” price. The ask price is almost always higher than the bid price. For example, on the same penny stock, the Market Maker may quote an ask of $0.06 and a size of 20,000, meaning that you can buy up to 20,000 shares from the Market Maker at six cents a share.
What is the Spread?
The spread is the difference between the bid and the ask price. In the example above, the spread is $0.01. Market makers make money on the difference between the bid price and the ask price.
In thinly traded markets where volume in a microcap stock is very low, the spread is higher. When trading volume increases, more shares are bought and sold so a Market Maker will decrease the spread to encourage more volume. Eventually, multiple Market Makers compete for business by constantly adjusting their bid and ask prices to facilitate trading.