For every possible trade, you first need to learn about that trade’s terms and essential foundations. This foundation ensures you are ready to take on the deals and make fewer mistakes.
Without this foundation, you cannot succeed in the trade. Similarly, two essential terms are used in the investment world: bid and ask.
The whole world of investment revolves around these two terms. Therefore, it is essential to know what these terms mean and the significant difference between them.
- The bid price is the highest amount a buyer is willing to pay for an asset, while the asking price is the lowest amount a seller is willing to accept.
- The difference between the bid and ask prices is known as the spread, representing the market’s liquidity and transaction costs.
- When trading stocks or other assets, the bid price is used when selling, and the asking price is used when buying.
Bid vs Ask
The bid is the highest price a buyer is willing to pay for an asset at a given moment in time, representing the demand for the asset among buyers. The ask is the lowest price a seller is willing to accept for an asset at a given moment in time, representing the supply of the asset among sellers.
Ask price is defined to be the lowest price an agent is willing to accept for the asset or product he wants to sell. This is called the bid-ask spread if you subtract the asking price from the bid price.
The comparison table below shows the other differences between the bid and ask prices.
|Parameter of Comparison||Bid||Ask|
|Definition||The maximum amount a buyer is ready to offer for a product.||Lowest amount a seller is ready to acquire for a product.|
|Users||Sellers use the bid price.||Buyers use the asking price.|
|Value||The bid price is always lower than the asking price.||The asking price is more significant than the bid price.|
|Multiple persons||Possible multiple buyers are willing to pay higher bid prices.||Not applicable to the asking price.|
|Range bound||The bid price will be mostly higher than the stock value in the market.||The asking price will be mostly lower than the stock value in the market.|
What is Bid?
The bid price is the maximum amount the buyer can offer for the product or asset.
For example, you want to purchase 10 shares of stock in a company for 100$. You set your bid price for each share as 10$. This is the maximum amount you are ready to grant for the claim.
Bid prices have a significant effect on the market value of the stocks. If the difference between the bid and the asking prices is more important, then it is not a good time to buy a product.
Suppose you want to sell your lemonade, and so put up a stall for this purpose. But it is the winter season. This is not a good time to sell your lemonade.
The customer is only willing to pay 1$ for the glass of lemonade while initially, you sell it at 5$. So, because of the greater bid-ask spread, the customer has the advantage in terms of the bid price.
You might have heard about bid auctions. In a bidding auction, multiple buyers compete to pay more than the other party to get the product.
This is also known as the bidding war. Political situations also have a significant impact on bid prices. So in these uncertain times, buyers avoid buying assets.
But if they necessarily have to buy, they lower their bid prices to accommodate the economic instability.
So, the stock exchange market acts like an auction where traders, the government, and corporations buy and sell their assets.
If you are willing to buy an asset as soon as possible, then you can place an order called the market order. This means that you will accept any price the market hands you.
What is Ask?
The asking price is the lowest amount of money a seller is ready to acquire for the product or asset.
In the example we discussed above, purchasing stocks, the buyer can only buy each share for 10$ if the seller is willing to accept 10$ for each share as the asking price.
Several factors can affect the ask prices. If the market situation is good, you would most likely be able to sell at your asking price because many buyers would be willing to buy it at that time.
Similarly, if the country’s economic condition is good, the bid-ask spread is minimal, and the sellers can have their desired ask prices.
Often, there are also times when the prices go up and down in an unpredictable manner. This situation is called volatility.
It is also a bad indicator for asking prices since you have a hard time setting the price and predicting the market situation.
Another fundamental concept in the bid-ask spread is the liquidity of the assets. It just means that you, as a seller, have a high chance to set your ask price if the bid price and ask price are closer.
The more liquid your assets are, the higher the chance of increasing your ask price.
But if a person is willing to pay the asking price as set by the seller initially and the bid-ask spread is also high, then this phenomenon is called “crossing the spread”.
Main Differences Between Bid and Ask
Some of the features that differentiate between Bid and Ask prices are given below:
- The bid price is the maximum amount a buyer is willing to pay for a product, while the asking price is the lowest amount a seller is willing to accept.
- Sellers use the bid price, while buyers use the asking price.
- The bid price is always lower than the asking price, while the asking price is more significant than the bid price.
- Multiple buyers are willing to pay higher prices in a bidding war for a product. This is not the case with the asking price.
- The bid price will be mostly higher than the stock value in the market, whereas the asking price will be mostly lower than the stock value in the market.
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.