Have you ever searched for the current price of a stock you were thinking about buying? If so, you might have found the last price but also noticed a bid price and an ask price. These numbers can influence the price at which a stock trades.
Simply put, the bid price is the amount a buyer is willing to pay to purchase a share of a particular stock, while the ask price is the amount the seller is willing to sell the stock for.
Keep reading as we explore bid vs ask price and how it can influence the profitability when trading stocks.
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What Is the Bid Price?
If you’ve ever participated in an online auction, you probably know that it involves placing a bid. This means choosing a price that the seller can either accept or decline.
Financial markets aren’t much different. Like online auctions, trading usually involves the bid price – the maximum a buyer is willing to pay for their chosen asset. Whenever you place a market order, you agree to buy at the next available ask price. If several buyers place bids, it can become a bidding war.
Knowing how to choose the bid price is incredibly important. If you’re a trader, the slightest fluctuation in the price at which your order is executed can significantly impact your profitability.
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Bid Price Examples
Suppose Lucy wants to purchase shares in Nvidia. After researching, she discovered that the stock is offered between $138 and $139.50. Since she can’t afford to pay more than $138.50, she places a limit order of $138.50.
Now, let’s assume Apple has an ask price of $251. Bidder A might bid $250, while Bidder B offers $248. In this case, Bidder B might increase its bid to $249. This scenario benefits the seller, as the buyer is pressured to pay more.
What Is the Ask Price?
The ask price is similar to the bid price; however, it refers to the minimum amount a seller is willing to accept for their shares. Similarly to the bid price, the ask price can change throughout a trading session. If the company has a significant trading volume the ask price can change frequently every minute.
Ask Price Examples
Usually, the ask price is higher than the bid price. Buyers are interested in purchasing their chosen asset for the lowest possible price, while sellers hope to earn as much as possible.
Let’s imagine a stock that has an ask price of $100. In this case, anyone who wants to buy it must make an offer of at least $100.
How Are Bid and Ask Prices Set?
You might wonder who decides the bid and ask prices. Well, the equity markets are complex. All market participants influence bid and ask prices, including institutional buyers (mutual funds, ETFs, hedge funds) and individual retail investors. If demand outweighs supply, bid and ask prices will increase.
With so many people and institutions involved, the market can quickly become chaotic. That’s where market makers come in. They match potential buyers with sellers and participate in deals when no one else is willing to buy or sell. For this, they are compensated with the spread, the gap between bid and ask prices.
Differences Between Bid and Ask Prices
There are several key differences between bid and ask prices. Most importantly, multiple buyers can place their bids (which can be higher or lower) on their chosen asset. Sellers, however, cannot ask for less than the ask price.
Another important aspect you should know is that the bid price is often referred to as the ‘seller’s rate.’ It’s not as confusing as it sounds. When somebody sells their stock, they will get the latest bid price. When somebody tries to buy a stock, they will get the latest ask price.
By comparing bid vs. ask price, you’ll also notice that ask prices are typically shown in decreasing order, while the available bid prices are displayed in increasing order.
Similarities Between Bid and Ask Prices
While bid and ask prices have differences, they are also in some ways similar. Both of these concepts are time-specific, meaning the price you see is offered at a set time. As you may know, financial markets are incredibly volatile. Sometimes, bid and ask prices can change within seconds, depending on demand and supply. So, if you plan to buy or sell a security, you should remember that the offered rate is not constant.
What Is the Bid Ask Spread?
When learning about the financial market, you’ll often hear about the ‘spread,’ which is the difference between the bid and ask price.
As you’ll notice, spreads can sometimes be as little as a few cents, depending on the price of the security. During periods of illiquidity or market turmoil, the bid-ask spread usually widens. That’s because buyers may not be willing to pay a price beyond a specific threshold, while sellers don’t want to accept anything below a particular level.
If you’re considering trading, you should pay attention to the liquidity. If you choose a product with a wide bid-ask spread, it will cut into your potential profits.
Generally, fixed-income exchange-traded products (ETPs) have the lowest spreads, with an average bid-ask spread of 0.25%.
Is the Last Price the Same as the Current Bid-Ask Prices?
In most cases, no. The last price shows the price the most recent orders have been filled, but it doesn’t always accurately represent what price you can expect if you decide to buy or sell at this specific moment. You should always look at the current bid and ask prices. They reflect the market much more accurately.
The Bottom Line: Bid vs. Ask Price
Did you know that the average daily volume in the US in 2023 was $515 billion and 11.0 billion shares? That’s a lot. If you’ve traded before, you’ve likely experienced that some orders were executed instantly while others took more time or couldn’t be fulfilled at all. These examples highlight how bid and ask prices are important in trade execution.
As a trader or investor, it’s critical to understand these terms well. After all, they are key to optimizing costs and maximizing your profits.