Updated Mar 31, 2022

What is Ask price & Bid price?

What are the ask price and bid price?

The bid and ask prices are best defined as the best price that a trader chooses to buy or sell a security for. In case it is a buyer, then the bid price is the highest price that the buyer is willing to pay. But, when we consider the case of a seller, then the ask price is the lowest price at which the seller is willing to sell a security or a financial instrument.

Another way of looking at Bid and Ask prices is the potential prices at which the traders, which are the buyers and the sellers are willing to transact.

Bid-Ask spread is a term that is frequently associated with bid price and ask price. The difference between the Bid price and Ask price is the Bid-Ask Spread.

Before one ventures to trade anything in the market, it is going to be helpful if one is sure of the trading terminology that is used. Similarly, a trader should also know about the market forces associated with these trading terminologies. The difference between the bid price and the ask price may be something basic. But in trading, it is one of the most crucial theories to understand.

Current price

For understanding more about a financial instrument’s bid price and ask price and the difference between the two, one has to understand what is current price; from the perspective of trading.

The current price is sometimes known as market value. On an exchange, it is an asset’s actual selling price.

The current price is in a persistent state of fluctuation. The value of the current price is determined by the price at which an asset was last traded.

As per the basic economic theory, the current price is determined where the market forces of supply and demand meet. When fluctuations occur in either supply or demand, then, the current price will rise or fall respectively.

On a market exchange, the current price is, henceforth, determined by the most recent price that a trader had paid for an asset. One of the ways of perceiving the activity is that within the market, the brokers, investors, and traders are interacting with one another.

The difference between bid and ask

The current price is a representation of a financial instrument’s market value. Similarly, the bid and ask prices respectively determine the maximum buying and minimum selling price.

Bid price

Let us consider an instance. When an investor wants to sell a stock, then he or she would be required to specify the maximum price that a buyer would be willing to pay for it. By taking a look at the bid price, this value becomes easy to determine. The bid price is often known as merely the bid. It is the maximum price that a buyer is willing to pay for a financial instrument.

Ask price

For understanding the Ask price, we will consider an instance wherein an investor is looking to buy a stock. He would want to specify how much any seller wants to sell the stock for.

This information can be understood by taking a look at the Ask price. The ask price is often just known as ask. It is the minimum price that a seller is willing to accept for an instrument.

In most cases, the bid price is going to be higher than an instrument's current price. The ask price, in the same coin, will be lower than the current price.

Understanding Bid and Ask

Bid and Ask are very important concepts, technically and in the real world. Nevertheless, numerous retail investors choose to overlook the bid and ask when they transact.

An important point to understand here is that the price of the last trade is the current stock price. It should be right to call it the historical price.

However, the prices at which buyers and sellers are willing to trade are the bid and ask respectively. Essentially, Bid stands for a security's demand while the Ask represents its supply.

Examples of Bid and Ask

Let us consider an instance that exemplifies the concept. Herein, the current stock quotation involves an Ask of $15.20 and a Bid of $15. So, an investor who wants to buy the stock would pay $15.20 for the same. But, an investor who wants to sell the stock would sell it for $15.

When we consider the difference between the bid price and ask price, it is frequently known as the bid-ask spread, bid-offer spread, or bid and ask spread.

As another example, we consider that a retail investor intends to purchase stocks in Security A. He sees that for Security A, the current stock price is $16.3. So, he chooses to buy 100 shares at $1,630. But, he sees that the total cost comes out to be $1,631, which added to his confusion.

It may be possible that the retail investor may feel that there has been an error. But he later understands that the current stock price of $16.3 is the price of the last traded stock of Security A. Herein, the investor paid the asking price of $16.31.

Bid-ask spread

For any financial instrument, the bid-ask spread is the difference between the bid price and the ask price. Just as an instance, the difference in price between someone buying a stock and someone selling a stock is the bid-ask spread.

Both metrics - Bid price and Ask price are available for viewing in real-time. The values for either term are updated constantly. One gets a fair bit of an idea about the size of the transaction cost and the market's liquidity by the changing differences between the two prices.

A financial market would be in a state of high liquidity, frequently when there are a large number of orders to buy and sell in that market. With this liquidity, traders are empowered to buy and sell closer to the market value price.

So, the more liquid the market is, the tighter the bid-ask spread will be.

But exactly the opposite is true when the market is not as liquid. Herein, the spread will increase as the trade volumes are low. So, it becomes difficult to sell and buy near the market value.