Bid and ask
Quick definitionCopy link to section
Bid and ask refer to the highest and lowest price a security can be sold or bought at any given time.
Key detailsCopy link to section
- The term bid refers to the highest price a buyer will pay to buy a security.
- The term ask refers to the lowest price a seller will accept to sell a security.
- The ask price is always a little higher than the bid price and the difference between the two is known as the bid-ask spread.
What are the bid and ask?Copy link to section
The terms ‘bid’ and ‘ask’ represent a price quotation of the best possible price at which a financial security can be bought or sold. It’s important to understand what the bid and ask are and how they work, particularly for stock market traders, and they are often overlooked. An explanation of bid and ask can be found in the example below.
CompanyXYZ has a price quotation of £50 / £55. If an investor wants to buy shares in the company they would pay the ask price, which is currently £55. If an investor wants to sell their shares, they would receive the bid price, which is currently £50.
Bid and ask prices change throughout the trading day and can represent demand. If a particular stock is in high demand, then the bid ask quotation will rise. If there is low demand for a security, the bid ask quote will fall.
The bid priceCopy link to section
The bid price is how much an investor is willing to pay for a security. The bid price is important for sellers. If an investor wants to sell their stock, they will have to look at the bid price to determine how much they can sell for.
The ask priceCopy link to section
The ask price is how much an investor is willing to sell a security for and is important for buyers. If an investor is wanting to buy a stock, they will have to look at the ask price to determine how much it will cost them.
The bid-ask spreadCopy link to section
The difference between the bid and ask price is known as the spread. This is a cost that all investors and traders encounter while transacting. The bid-ask spread is sometimes referred to as a ‘fee’ charged by the market maker. Short-term traders tend to favour securities with low spread, while long term investors may not be too concerned with spread.
The bid-ask spread is not a fixed amount and will often change throughout a trading session. A highly liquid market will have a closer bid-ask spread, while an illiquid market will have a wider spread. Generally speaking, the larger, or more traded a security, the lower the bid-ask spread will be.
Where can I learn more?Copy link to section
For more information about bid and ask, and other key financial concepts, check out our courses. To learn more about investing, our helpful courses will take you through everything you need to know.
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