Bid price vs ask price: definition & difference

Bid Price

The bid price refers to the price an investor agrees to pay for the security.

For instance, if they want to sell a stock, they must determine the amount someone is comfortable paying for it. It could be done by seeing the bid price. It stands for the highest price which an investor may pay for the stock. Visit plataformas de trading

Ask Price

The ask price refers to the price that an investor agrees to sell the security for.

For instance, if an investor is looking to purchase a stock, they will have to establish the price another trader agrees to sell it for. For this, they need to see the ask price, the lowest price that another trader would sell the stock for.

Understanding Bid and Ask

Bid and ask is a key concept that several retail investors tend to not pay attention to when transacting. It is necessary to keep in mind that the current stock price refers to the price of the last trade – a historical price. Whereas, the bid and ask refer to prices at which buyers and sellers agree to trade at. Essentially, bid indicates the demand while ask stands for security supply.

For instance, when the current stock quotation is inclusive of a bid of $13 as well as an ask of $13.20, an investor who wants to buy the stock would pay $13.20. An investor who wants to sell the stock would do so at $13.

Difference Between a Bid Price and an Ask Price

Bid prices indicate the highest price that traders agree to spend on security. The ask price, on the other hand, stands for the lowest price which the security owners agree to sell it for. For instance, a stock trades at an ask price of $20. So someone who wants to buy it should be offering a minimum of $20 to be able to make the purchase at the current rate. The gap lying between the bid and ask prices is known as the bid-ask spread.

What Does It Mean When the Bid and Ask Are Close Together?

If the bid and ask prices are too close, it implies that there is a lot of liquidity in the security.

In this case, it is said that the security has a “narrow” bid-ask spread. It could be a helpful situation for investors since entering or exiting positions, especially the big ones, gets simplified.

On the other hand, securities that have a wide bid-ask spread could be time-consuming and expensive. Visit latam

How Are the Bid and Ask Prices Determined?

The market sets the bid and ask rates. To be specific, they are set by the real buying and selling decisions traders in the market make. If demand is higher than the supply, the bid and ask rates would go up gradually. Alternatively, if the supply is greater than demand, bid and ask prices would fall. The bid-ask spread is determined on the basis of the overall level of trading activity in the security.