There’s a price for everything in the financial markets. Bid (buy) and ask (sell) prices refer to the amount of money a buyer and seller are willing to accept for a tradable asset.
Simply put, “bid” and “ask” are the best prices a buyer/seller will buy/sell an asset for.
This article at a glance:
- Bid is the price a buyer is willing to pay for an asset. Ask is the price a seller is willing to sell an asset for.
- Both prices respond to the supply and demand of an asset.
- The difference between the two is the bid-ask spread.
- The bid price will almost always be lower than the ask price.
What are bid (buy) prices?
The bid price is the amount of money a trader is willing to pay for a security. For example, the bid price for EUR/USD could be 1.1356. This quoted price is the amount you’ll pay for 1 EUR in USD; 1 EUR costs 1.1356 USD.
This is the “buy price” the trader will accept – the maximum amount they are willing to pay for EUR at that specific point in time.
What are ask (sell) prices?
The ask price is the amount of money a security is being sold for on the market. Think of it as the security’s retail price. It relates to the amount of money sellers are asking for an asset.
What does it mean when bid and ask are the same?
The ask price will almost always be higher than the bid price. Think about it – if a shop buys a carton of milk at 5 USD, why would they sell it for 5 USD?
Rarely, a crossed market can occur (where bid goes above ask), or bid and ask prices can equalize. These unusual situations are quickly rectified, as the market moves immediately to capture the opportunity.
Bid vs. ask: What’s the difference?
Bid and ask prices respond to the forces of supply and demand. When demand is high, more people want to buy an asset than is currently available. In this case, bid and ask prices start to climb, and the asset becomes more expensive.
Similarly, when the supply for an asset is higher than the actual buyer demand for it, bid and ask prices will start moving downwards.
The difference between the bid and ask prices is known as the bid-ask spread. This spread is how brokerages and market makers make their money.
The spreads and the liquidity of an asset have an inversely proportional relationship. When the bid-ask spread for an asset is narrow, it means the asset has high liquidity and can easily be traded. The smaller the spread, the more value you’re getting. Conversely, a wider bid-ask spread indicates lower liquidity in the market for that asset.
Whether you’re buying or selling an asset, aim to trade at the best possible price. As a trader, you want to maximize the value of your trades, and make sure that they’re not coming in too expensive.
This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. INFINOX is not authorized to provide investment advice. No opinion given in the material constitutes a recommendation by INFINOX or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.