The bid price is the maximum amount an investor is willing to pay to acquire a certain asset. It concerns an investor who does not hold security and wants to buy in a specific period of time.

For example, if an investor wants to buy shares of Amazon, the trader will see the buying (bid) price of $100.60 and the selling (ask) price of $100.50. Since the investor is buying the security, they are going to pay $100.60 to acquire one share.

The "ask" price is the minimum price at which an investor is willing to sell a certain asset. It concerns an investor who owns the security and wants to sell it in a specific period of time.

For example, if the same investor of the previous example wants to sell their shares of a wine investment they hold, the investor will see the buying (bid) price is $100.60 and the selling (ask) price is $100.50. Since the investor wants to sell the security to the market, they are going to sell it for $100.50.

The financial market is defined by the activities of a huge number of sellers and buyers. As we already mentioned, the activities of these traders regulate the market according to supply and demand.

Let’s say investor X wants to invest in whisky and buy some shares, and another trader, trader Y, holds stock at ABC whisky company. Investor X wants to buy the stock at $100.60, while investor Y wants to sell the stock at $100.50.

These operations are done in the market through market makers or brokers. A broker buys the stock from investor Y for $100.50 and sells it to investor X for $100.60. The bid-ask price difference is the broker’s profit, and in this example, the broker gains $0.10.

The bid price is usually higher than the ask price. This way, if investor X purchases stock for $100.60 and in a short time decides to re-sell it to the market, the investor will sell it for $100.50, incurring a loss of 10 cents - this is a type of cost that is paid to market makers.

Bid-Ask price vs Current price

Many traders confuse the ask-bid price with a stock’s current price. The current price of a security represents the price of the last trade that took place in the market, while the ask-bid price reflects the current market activity. It shows the price at which traders are willing to buy or sell a certain asset.

Usually, the bid price is higher than the current security price, while the ask price is lower than the security market price. This deviation changes constantly to keep up with market activity and determines the bid-ask spread.

After a company goes public and announces its IPO price, it enters the market, and trading activities start taking place. The demand for a stock drives the buying price. When there are more buyers the buying price will increase, dragging with it the bid-ask and the stock price.

On the other hand, if there are more sellers, the ask price or the selling price will decrease, and as a result, the bid-ask price and the stock price will decrease.

These dynamics and price fluctuations are derived from global events, news, and speculations which indicate the behavior of the traders, who react by either buying more or selling more.

Bid-Ask Spread

The spread is the difference between the bid price and the asking price. It is considered a cost for traders, and a gain for market makers. Brokers are the intermediaries between different traders, and they receive this spread as compensation for matching up traders who want to buy and sell their stocks.

The spread is a major source of income for brokers. The bid/ask spread for one trade of a single stock can be as little as 10 cents or as high as 50 cents, however, brokers handle a huge amount of transactions simultaneously, for multiple stocks for many traders around the world.

Many investors take the spread as a primary criterion for choosing the right broker, as traders look to find brokers who offer the tightest spread ranges over different financial instruments, taking into consideration that a small price spread means a small cost paid by the trader.

The spread price is determined by the buying and selling activities of the market, and the spread range contracts and expands accordingly. This is a type of trading cost that is incorporated into the security price itself, so brokers do not charge it separately.

The spread also represents the liquidity of an asset. The smaller the spread range, the more liquid the security is. Blue-chip stocks have a smaller spread than other smaller-scale corporations. The same goes for major currency pairs, which have a smaller spread range than uncommon currency pairs.

When the spread is small, it means that the security has enough liquidity, therefore it is easier for a trader to buy or sell that security. 

On the contrary, when a spread is relatively larger, like in exotic currencies, there are fewer traders buying and selling, and it might take more time to execute a market order.

Similarly, when the liquidity of an asset is high, it means that the stock’s bid and ask prices are close to the market price since there is a sufficient pool of traders buying and selling, and a huge number of publicly released shares.

• The bid is the maximum price the trader is willing to pay to acquire an asset
• The ask is the minimum price the trader is willing to receive to sell an asset
• Bid-ask prices are different from the current market price, and they fluctuate depending on market activity, and according to the law of demand and supply
• The spread is the difference between the bid and the ask price, and it is the main determinant of trading stock that investors pay to buy or sell any security
• The spread represents how liquid an asset is, and how easy is it to trade a specific asset