What it is:
The bid price is the highest price that a prospective buyer is willing to pay for a specific security. The "ask price," is the lowest price acceptable to a prospective seller of the same security. The highest bid and lowest offer are quoted on most major exchanges, and the difference between the two prices is called the "bid-ask spread."
How it works (Example):
When an investor decides he wants to buy a security, he doesn't have to buy it at market price; instead he can use a "limit order" to specify to his broker that he wants to buy the security, as long as it's under a certain price.
For example, shares of Company XYZ have been trading between $20 and $25 throughout the day. George is interested in buying share of XYZ, but he doesn't want to buy them for more than $22. When he talks to his broker, George tells him that he wants to set a "limit order" for 100 shares at $22. Because he's indicated a "bid price," George's broker will only execute the trade at (or below) that price.
Why it Matters:
Usually, the bid price for a specific security displayed in most "quote" services (like Yahoo Finance) is the highest bid price in the market. But investors don't have to buy or sell securities at these prices. Investors can specify their bid price when telling their broker to execute a trade. The trade may not be executed immediately (or even ever, depending on sellers' asking prices), but the buyer can rest assured that he didn't pay more than he intended.