Updated Mar 09, 2022
What are the ask price and bid price?
What are the ask price and bid price?
The term, ask and bid refers to a quotation that is two-way based; indicates the best essential price on which a security can be sold or bought at a specific point in time. Fundamentally, the bid price represents the utmost number of the price that buyers usually are interested to take for the same security. A transaction occurs while a buyer is ready to pay the paramount offers available or is ready to sell the same asset at the highest bid. And the difference between the two; ask price & bid price, is denominated as the key indicator of the asset’s liquidity. Generally, the smaller spread is the better liquidity.
Understanding Ask & Bid Prices
The average stakeholder contends with the ask spread and bid as an implied value of the trading. For instance; if the recent price or quotation for a specific stock is Rs.10.50 or Rs.10.55, buyer X will buy the asset at the first price at the current market standards. The buyer would pay Rs.10.55, while the buyer Y, who wishes to sell it with the current market standards, would receive Rs.10.50.
Now, Who Gets Benefitted from the Bid-Ask Spread?
The bid spread works to get the advantage of the current market values. With continuing the above example; the market maker quotes a price of Rs.10.50 to Rs.10.55 for a particular stock that indicates a willingness to buy Rs.10.50 and then sell it at Rs.10.55 which is the ask price. This spread represents the current market volume’s profit.
Bid-ask spreads may vary hugely depending on the asset and its market value. Various blue-chip organizations constitute the Industrial Average that may have some bid-ask spreads of just a few cents. While on another side, small-cap stocks that trade less than 10000 shares a day might not be having a bid-ask spread of not more than 50 cents. Sometimes, the bid-ask spread widens intensely during periods of illiquidity or the market commotions, since the traders are not willing to pay a specific price beyond the certain threshold and the sellers may also not be willing to take the prices below a specific level.
Difference Between an Ask Price & a Bid-Price
Bid price refers to the uppermost price that marketers are willing to take for security. And the ask price conversely refers to the bottommost price that owners are always willing to sell for a specific security. For example, if a stock is trading on an ask price of Rs.20, a person who wishes to buy the stock would offer it at least Rs.20 as well to purchase it at the current market price. Therefore, the gap between the two is often referred to as the bid-ask spread.
What If, When the Ask & Bid Are Closed Together?
When the ask and bid prices are too close to each other, it typically means ample liquidity in the specific security. Here, the security will have a narrow bid-ask spread. This situation is always helpful for the investors as it makes it trouble-free to enter or exit from their position, specifically in the case of optimistic positions. Contrariwise, securities alongside a wide bid-ask spread, whereas the bid and ask price are far apart can be timewasting and much expensive to the trade.
Why Are the Ask & Bid Prices Determined?
Ask & bid prices are settled by the current market scenario. Significantly, they are formed by the real buying norms and selling judgments of the people as well as some institutions that usually invest in the particular security. When the demands outstrip the supply; the ask and bid prices significantly shift upwards. On other hand, when the supply exceeds the demand, the ask and bid prices drift downwards. Thereafter, the spread between the two is dominated by the utmost level of trading activities in the security along with the advanced activities that lead to narrow the bid-ask spreads.
When you trade the stocks; the price or volume shows you the specific ask price and the bid price. The bid price indicates the best price where the other party is ready to buy the stock. It will be the best price at which the particular stakeholder sells the stock.
How to Break Up the Bid-Ask Spread?
The buy price and buy quantity can also be called the bid prices or the bid quantity. The price and the quantity that some professional buyers are willing to buy at. While you trade your shares, you usually sell at the preeminent rates by assuming that there are no other invisible or hidden charges. For example, if you raise an order to sell 725 shares of Reliance India Limited, it will be implemented as 47 shares at 925.25 INR, 666 shares at 925 INR, and 12 shares at 924.90 INR.
Why Is the Bid-Ask Spread Is Important?
As explained above, the bid-ask spread is the amount to which the preeminent sell price exceeds the best bid price. Normally liquidity in SBI, RIL, and Tata Motors always tend to be placed in normal quotes. But when we tend towards less liquidity and specifically the small-cap & mid-cap security, the bid-ask spread can be widened substantially. Some important facts need to understand to know why is the bid-ask spread so eminent for the traders.
Bid-ask spread is a crucial indicator to measure the liquidity of any particular stock. Generally, the liquidity in stocks is more likely to find the pricing. Some high liquid stocks are the part of Sensex and Nifty that have the lowest bid-ask price. Bid-ask spread is a tool to measure the trading risks of the stock as well. For instance; a whole idea behind executing an order in the market is based upon the stock that is close to the preeminent price as possible. The higher risk in the trading always brings the higher bid-ask spread that imposes an unintended cost on the trading. While the spread price is not essentially measured, it imposes a steep charge over a specific period.
The bid-ask spread guide on a type of particular order is always essential for the stockholders. Generally, if the bid-ask spreads become narrow, you will get the best price alongside the market orders. Nevertheless, if the bid-asks are wider, the limit orders will be a better choice for any investor.
