Key Takeaways

• The bid is the lowest price the buyer will pay for the asset, and the ask is the highest price that the seller would accept for his/her asset.
• The difference is called the bid-ask spread and is a cost that is embedded in just about all trades.
• The price you pay when making a “market order” to purchase the stock is the “ask price”. A market order indicates that you’re selling the stock at the prevailing market price, which you would see when placing a sell order.
• A tight spread is considered a more liquid market and a spread is a sign of less activity and higher transaction costs.
• The price dynamics of these same assets are followed for all other assets, such as stocks, forex, bonds and cryptocurrencies, but with slight variations in quoting from one market to another.
• Explain the terms Bid and Ask.

What Do Bid and Ask Mean?

All assets traded, such as shares of stocks, currency pairs, bonds or cryptocurrencies, have two prices at any given time, rather than one. The difference between the bid price and the asking price is the highest price that there is at the moment for that asset from the buyer. The ask price (also called the offer price) is the lowest price at which the seller offers to sell it.

There are two prices since a public market is always a two-sided market. A buyer’s desire is to pay the least and a seller’s, to receive the most, and so the market finds a midway point between the two. This difference is referred to as the bid-ask spread, and it appears in almost every quote that you see, whether it’s a stock ticker, a forex website or an order book on a crypto exchange.

To visualize a simple negotiation. As an example, when you are selling a used car, you may price it at $10,000, and hope that you will be close to that price when it comes to the actual transaction. A buyer comes up to him and offers him 9500.A Buyer comes forward and offers nine thousand five hundred. 

If you vs. them, it is the difference of 500 dollars; if you are asking, then it is an ask, if they are offering, then it is a bid. The difference is “bid-ask” spread and the five hundred dollar difference is the offer. In the financial market, this negotiation takes place continually, without any human manipulation, and virtually every second, through the help of a negotiation book that matches buyers and sellers.

Do I Buy at the Bid or the Ask?

This is one of the most common misconceptions that new traders have and as soon as you realize the distinction between the two, you will know the answer.

If a person buys an asset using the market order, he or she will be able to pay the price at which the sellers want to sell it currently. The biggest disadvantage of a market order is that you’re only charged the current ‘bid’ price, which is the price that the buyer is willing to pay.

To sum up, just buyers pay the sellers the ask, and sellers pay the buyers the bid. All stocks, options and Forex and most markets with a 2 way quote system are covered. It also provides you the explanation why if you purchase any asset and you try to liquidate it within a few hours or days with no worth change whatsoever, you’re likely to make a little loss in your investment. The “built-in cost” is the spread since you are buying at the higher price (ask) and selling at the lower price (bid).

There is one other type of order, however, it is the limit order. The limit price to buy will be executed when the price of the ask decreases to your price or less. If the price of the bid goes up to your limit or above, the limit order to sell will be filled. This will give traders more control over the price they actually pay or receive when the order is executed, but if the market never gets to the price, then the order may not be executed..

If the Bid is higher than the Ask?

In a well-functioning market, the asking price will always be higher than the bidding price; the asking price will be the price set by the bidder. However, if at any time the highest bid from the buyer is equal to or higher than the lowest price that the seller is willing to accept, the matching system would automatically effect a transaction between the buyer and the seller as they would both have agreed upon a price. That trade would be executed immediately and the spread would be closed to get the new bid and ask which would be the next best available price.

Because of this automatic matching, a real crossed market, where the price of the offer is greater than the price of the bid is extremely rare in a good exchange and will probably only happen for an instant (or just a moment) until matched. When a bid on the data feed seems to be much higher than the ask price for more than a split second, it’s likely the result of a lagged data source, a display glitch or a broken market, meaning that different venues are just temporarily not in sync.

What Does “100 Bid” Mean?

On many level 2 order books and in detail quote screens, in addition to the price, you will also find a size listed. A bid of 100 bid” usually indicates that there is an “order to buy 100 1s at 100 bid”. It’s not a price, but a depth number, that is, the number of volumes at this price at this depth.

It’s crucial, since not only is the price of the bid a factor to take into consideration when deciding whether or not you can sell off an asset for that price, however, it can also work against you. If you have just 100 shares on the top of the price book and wish to liquidate 10,000 shares, you will likely have to place your orders at several price levels in order to satisfy your order, which is referred to as slippage.

How bid ask happens is explained

The difference between the two prices is known as bid-ask spread. One price is the price which buyer desires to pay (the bid price). The other price is the price a seller desires to receive (asking price). A buyer here is looking to pick up the security at $49.95, but the seller won’t budge below $50.00, that five-cent gap is the spread.

This is a transaction fee (not necessarily a platform fee or commission) that is charged in addition to the transaction fee. It also carries the expense to the “market makers” that are there all the time to make a buy and sell in the asset. It also allows for paying compensation to “market makers” who are willing to take on risks to hold an inventory of the asset and to be able to provide liquidity to the market at all times.

Example:

It’s not quite that it has a lot of spread, but it certainly has a lot of liquidity and trading volume. That’s compared to a small cap stock that trades thinly with a bid of $4.80 and an ask of $5.10, which will result in a wider spread, or more than 6% of the bid price, for all buyers and sellers of the stock.

Bid vs Ask: Why the Spread Size Varies

Do not assume that the spread width is random. It is typically an indicator of the liquidity and the degree of trading of an asset.

The major currency pairs (e.g. EUR/USD, GBP/USD, USD/JPY, or any other popular, highly liquid pair) and big, well-known stocks can have spreads as close as 10 pips, since these are the most sought-after to trade at the same price.

There are major currency pairs (EUR/USD, GBP/USD, USD/JPY and any other widely traded pair) and large stocks that are recognisable, which will often have very narrow spreads as there is continuous demand for them to be bought or sold at similar prices. These spreads are wider in less liquid markets like smaller companies, less popular bonds or cryptocurrencies which aren’t as well-known as Bitcoin.

Bid and ask price in the stock market.

In stocks the price that one sees being bid for and offered is the price that the best people willing to offer and willing to bid for that stock are willing to pay and offer the stock at that exchange(s) at that time. For a stock that is widely held, for example, a component of one of the big indexes, a two cent spread could be seen. If a stock is thinly traded or a small cap stock has recently been listed, the bid and ask price can be quite a bit more distant, e.g., $12.10 – $12.45.

The spread is indeed very small or small in general, and doesn’t bother retail investors when trading very popular and volume stocks in general. But, for those active traders of the smaller names, it is important to watch the spread between the smaller and less liquid names.

Bid vs Ask in Forex

As with all markets, in the foreign exchange market, any pair of currencies quoted will have both a bid and ask quote as all the traders will be selling one currency and buying another. The numbers 50 and 52 inside the quotation EUR/USD 1.0850/52 refer to the bid and ask price. If you are going to sell euros, the first number (1.0850) will be the number at which you will sell and if you are going to buy euros, the second number (1.0852) will be the number at which you will purchase.

That’s because a trader who wants to buy euros at this exchange rate would actually be buying dollars at the higher rate, $1.0852. The person selling the euros would sell them for $1.0850 for each euro sold.

This difference between the two is referred to as the spread and in this case is just 2 points. The smallest price change in any currency pair is called a “pip”, and that’s just the “standard unit” used by traders to track the price change and to measure the spread.

 The spread of major pairs (e.g. EUR/USD, USD/JPY) are usually very tight with a large amount of trading volume, whereas the spreads of exotic pairs (e.g. EUR/CHF, USD/JPY) can be wider. With accounts that do not require brokerage fees, many of the earnings a broker can be able to earn are dependent on the spread in Forex.

Bid vs Ask for Bonds

Bond quotations resemble stock quotations, but are valued on the same basis, except for one little difference. Bond quotations resemble stock quotations but have a difference , they are priced at the same level. Bonds usually have their prices quoted as percentages of its par value, which is usually 100. The price that a bond with a par value of $1000 will sell at is then $990. Where a bond is selling at more than 100, for example, 102, it will be sold at a premium – in this case, $1020 for a $1000 bond.

Government bonds are usually quoted in terms of 32nds or fractions and not in decimals. In case of a bond which is quoted at 105:07, it means 105 and 7/32, which in decimal terms will be 105.22. However corporate bonds are more likely to be quoted in decimals or eighths.

This difference between what the dealer is willing to pay and what the dealer will sell is greater for those assets that are not very liquid such as corporate and municipal bonds while it is smaller for highly liquid assets such as Treasury bills.

Bid vs Ask vs Last Price vs Market Price

The words can be misleading since they all apply to the same asset, but with different meanings.

The last traded price will be from the last completed trade (this can be seconds ago). The bid and ask, however, are forward-looking, and show what buyers and sellers are willing to do today. However in a fast moving market the last price and the next bid/ask may be very different, and so relying solely on the price of the last trade before placing a big order may sometimes lead to a shock fill price.

Bid and Ask in Cryptocurrency Markets

Cryptocurrencies exchanges operate like regular exchanges, and feature an order book that shows outstanding buy and sell orders for each currency pair. Spreads on lesser known cryptocurrencies can be much wider than those on a more popular stock or currency pair in comparison, and may also fluctuate more than the more popular markets due to their volatility and potential lack of liquidity. The spreads are tighter, similar to what you’d find on a stock with high trading volume, for Bitcoin and other high volume assets on exchanges you can trust.

When you are monitoring the bid and ask prices of Bitcoin or following the overall market trend, a real time reference such as the price page of BTCC can provide you the most up-to-date price that you want to use along with the exchange’s order book before you trade.

How Market Makers Influence the Bid-Ask Spread

Market makers are companies or individuals who offer to buy and sell an asset at a specified price at all times, even if they don’t have someone standing by to match their buy or sell. They are set in place for one purpose: to ensure the liquidity of markets, that is, a trader can buy or sell a position within the market without having to wait to see who else is on the other side of the transaction.

By doing this, market makers make money from the spread. They initiate trades at the bid price and exit at the ask price and they earn the price difference over numerous trades. This profit per trade is negligible for a stock that is trading heavily, usually just a few pennies, but when you take into account the millions of shares that change hands daily, it’s a substantial amount. 

Thinly traded stocks, bonds that aren’t found in many lists or smaller cryptocurrencies tend to have wider bid-ask spreads than more liquid assets, primarily because market makers are willing to accept more risk in holding the more exclusive assets.

It is important to note that not all markets are traditional markets that are served by either human or institutional market makers. Most exchanges today, even those for cryptocurrencies, have electronic order books and the bids and offers arise from several parties’ standing orders, instead of from one specific company. The spread’s underlying logic is the same as long as the liquidity is being provided by others.

Common Mistakes Traders Make with Bid and Ask Prices

When newer traders first begin to consider bid/ask prices instead of just one ticker price, there are a few common pitfalls that they may fall into.

You’ll pay the last price at which the stock was traded. The final bid is for a completed deal that could be seconds or even minutes old. The price you would be required to pay when you make the actual purchase may differ significantly from the last time the price was printed, in a fast moving market.

Failure to consider the spread on illiquid assets. For those who are trading frequently in and out of a position in a stock with a thin trade volume or a small cryptocurrency, a wide spread can quietly take a bite out of returns.

Not examining the order book depth before executing large market orders.Failing to review order book depth before trading large market orders. If a big market order fills multiple levels on the order-book, it is likely to be executed at an average price that is worse than the price at which order books trade, a typical expense referred to as slippage.

Mixing up the “bid” and “ask” from the wrong point of view. Because terms reflect the market’s outlook and not the trader’s, it is very easy to get confused about which side you are playing at a moment’s notice , especially when you’re new to reading the quote screen.

When an order fills it’s a lot better to not just look at the one number you’ve been quoted, but to consider the size and price of the order.

Conclusion

One of the most useful skills a new trader can learn is to appreciate the concept of bid and ask prices, as it directly helps to explain why the price you are willing to pay is not necessarily the same as the counterparty you’re trading with is willing to offer. So once you understand the concept of the spread, which is the difference between the ask and bid, and who is the one that’s willing to provide liquidity in the market, it becomes a lot easier to understand all of the different quotes that you’re seeing across stocks, forex, bonds, and crypto. 

While watching the spread width is a relatively insignificant detail, it can still be quite useful when it comes to timing and costing your trades, whether on your broker’s website or on any other pricing reference site such as the live price tracker on BTCC.