Future Business Leaders of America (FBLA) Securities and Investments Practice Test

What does the term 'bid' refer to?

1. The price a dealer is willing to pay to a customer selling a stock

2. The maximum price a customer is willing to pay for a stock

3. The average market price of a stock

4. The price set by the exchange for initial public offerings

The correct answer is: The price a dealer is willing to pay to a customer selling a stock

The term 'bid' specifically refers to the price that a dealer or buyer is prepared to pay for a stock or other security. This is a fundamental concept in the financial markets as it represents the demand side for a particular asset. When a customer decides to sell stock, they will often seek out the highest bid available in the market to ensure they get the best price for their shares. Understanding the bid price helps investors navigate the buying and selling process, especially in active markets where prices can fluctuate frequently. The bid is always in contrast to the 'ask' price, which is what sellers are willing to accept for their stocks. The difference between the bid and ask price is known as the spread, and it can indicate the liquidity of a particular security. In this context, the other options do not accurately define 'bid.' The maximum price a customer is willing to pay is better described by the term 'ask,' while the average market price would pertain to overall market trends rather than a specific transaction. Additionally, the price set for initial public offerings involves a different process entirely and is not relevant to the standardized definition of a bid in secondary markets.