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Definition of Bid Price & Ask Price

Find out the difference between the bid and ask price. How does the bid price and ask price affect liquidity spread and markets? Find out with our training guides.

The offer price is the lowest price a seller will accept for a financial instrument, while the bid price is the maximum amount a buyer is willing to pay. The term "bid-ask spread" is frequently used to describe the difference between the bid price and the ask price.

It helps to become familiar with the trading jargon used before trying to trade on any market. Any trader can build a solid foundation by being aware of the fundamental trading concepts and the market dynamics that influence them. One of the simplest but most important trading theories to comprehend is the distinction between the bid price and the ask price.

To understand the difference between the bid price and the ask price of a financial instrument, you must first understand the current price from a trading perspective.

Current price

The current price, also known as the market value, is the actual selling price of an asset on the stock exchange. The current price is constantly fluctuating and is determined by the price at which that asset last traded.

According to fundamental economic theory, the market forces of supply and demand meet to decide the present price. The current price fluctuates due to changes in the supply or demand, respectively.

Therefore, the most recent price that a trader paid for an asset determines the current price on a market exchange. It is the result of interactions between brokers, investors, and traders in a particular market.

Bid price and ask price

As the current price represents the market value of a financial instrument, the bid and ask prices represent the maximum buying and minimum selling price respectively.

The bid price, more commonly known as simply the ‘bid’, is defined as the maximum price a buyer is willing to pay for a financial instrument.

The ask price, usually referred to as the ‘ask’, is defined as the minimum price a seller is willing to accept for the instrument.

The bid price is usually higher than the instrument's current price, while the ask price is generally lower than the current price. The difference between the bid price and ask price is known as the bid and ask spread, bid-offer spread or bid-ask spread.

What is the bid-ask spread?

The bid-ask spread, or the bid and ask spread, is the difference between an instrument's bid price and the ask price. So, the difference in price between someone buying a stock and someone selling a stock represents the bid-ask spread.

The bid and ask prices are displayed in real-time and constantly updated. The changing difference between the two prices is a key indicator of the market's liquidity and the transaction cost's size.

High liquidity in a market is often caused by many orders to buy and sell in that market. This liquidity enables you to buy and sell closer to the market value price. Therefore, the bid-ask spread tightens the more liquid a market is. However, the opposite is true when the market is less liquid. In this case, the spread increases as it is harder to sell and buy near the market value due to a lack of trade volume.

Bid and ask price example

In the context of the trading platform, the bid and ask prices are represented by ‘BUY’ and ‘SELL’ respectively in any price quote window. The number ‘2.0’ between the buy and sell price represents the bid-ask or buy-sell spread. This spread is derived by subtracting the sell price from the buy price.

1.1591 (buy price) – 1.1589 (sell price) = 0.0002.

The spread is always based on the last large number in the price quote, so it equates to a spread of 2 in this instance.

Source: CMC Markets UK

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