10 May 2024 - 6min Read

Trading strategies

What are bid and ask prices in trading?

When trading the financial markets, two prices will always be quoted for any financial instrument. These two prices are known as the bid price and the ask or offer price.

The bid price refers to the price investors, brokers, or institutions are willing to pay for a financial asset. Meanwhile, the asking price refers to the price for which investors, brokers, or institutions are willing to sell the financial instrument.

You’ll also be able to see a difference in price between the bid and ask prices; this is called the spread. The spread is one of the indicators traders use to identify the liquidity of an asset.

Generally speaking, if the spread is small, it means the liquidity of the asset is higher. And vice versa for when the spread is wider.

Before a trader decides to participate in the financial markets, it might be best first to understand the basics of trading, such as the bid and ask prices.

With that said, we’ve created this article to provide you with a better understanding of the differences between these two prices, including information such as the main difference between how the bid and ask prices are determined.

TABLE OF CONTENTS

Key takeaways

  • Two prices are always available when trading a financial asset: bid price and ask price.
  • The asking price is the price at which a trader will open a buy position.
  • The bid price is the price at which a trader will open a sell position.
  • The difference between these two prices is known as the spread.
  • The bid and ask prices are determined by supply and demand.

Marc Aucamp

Content Writer

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What is the difference between the bid and ask price?

As we mentioned earlier, the bid prices refer to the price investors, brokers, or institutions are willing to pay for a financial asset, and the asking price refers to the price investors, brokers, or institutions are willing to sell the financial asset for.

Now, we know that the bid price refers to the price investors, brokers, or institutions are willing to pay for a financial asset; what this means for you as a retail trader is if you want to open a sell position, you’ll look at the bid price. 

Meanwhile, if you are looking to open a buy position on a financial asset, you’d look at the asking price because this is the price investors, brokers, or institutions are willing to sell at.

You’ll find that the asking price is always higher than the bid price; the reason for this is due to the spread. We’ll explain the spread and its significance in more detail later in this article.

There might be cases where the bid and ask prices are the same. However, this is very rare because the spread is always present. If this does occur, it will be rectified quickly to keep up with the relevant market prices for that financial asset you might be trading.

bid (sell) price vs Ask (buy) price

Example of bid and ask

Now that you have a better understanding of the bid and ask prices let’s look at an example to put this into perspective.

Let’s say you’re looking to trade Facebook shares. You see that Facebook has an asking price of $100.02 and a bid price of $100; the $0.02 is the spread. 

If you were to open a buy position, you’d look at the asking price of $100.02; if you were to open a sell position, you’d look at the bid price of $100.

Now, suppose you decide to open a buy position of 10 shares of Facebook stock at an asking price of $100.02; this will give you a total of $1000.20.

If you decide you’d rather sell ten shares of Facebook stock at a bid price of $100, this will give you a total of $1000.

In this example, the $0.20 would go to the trading broker as payment for executing the trade on your behalf.

What is the bid and ask spread?

As previously mentioned, the difference between the bid and ask prices is known as the spread. 

The spread represents the cost that goes towards the broker in order to execute a trade on your behalf; at the same time, it’s also the broker’s compensation.

There are two different types of spreads available in trading: fixed spreads and variable spreads. Fixed spreads mean the spread will stay the same during bid and ask price fluctuations. Whereas variable spreads change with the fluctuation of the bid and ask prices.

The spread also indicates liquidity, which is truer when trading with variable spreads. 

Liquidity works in the following way: If a financial asset has a high level of liquidity, it means a large number of market participants are willing to buy or sell that particular asset. Whereas if the liquidity level is low, there aren’t many market participants for a specific financial asset.

Now, the way liquidity impacts the spread is as follows: if a financial asset has a high level of liquidity, the spread will generally be smaller, whereas if a financial asset has a low level of liquidity, the spread will usually be wider.

The reason why the spread becomes wider with a lower level of liquidity is because it becomes more difficult to buy or sell a financial asset due to a lack of trading volume.

Spread in pips

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How are the bid and ask prices determined?

The bid and ask prices are determined by the market. Specifically, they are determined by the buying and selling decisions of traders, investors, and institutions.

This translates to supply and demand.

If the demand for a financial asset increases, the bid and ask prices will also gradually increase. Meanwhile, if the supply of a financial asset increases, it will cause the bid and ask prices to decrease gradually.


People also asked

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The bid and ask prices will impact trading through the supply and demand for any financial asset a trader might want to trade. If the demand for a particular financial asset is higher than the supply, then the bid and ask prices will increase.
Whereas, if the supply exceeds the demand for a certain financial asset, the bid and ask prices will gradually decrease.

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Market news can have a positive or negative effect on the market. This will all depend on the viewpoint of market participants, generally referring to financial institutions or countries (if you were to trade the forex market).
If they believe the news for any financial instrument is positive, it tends to increase prices, which means the bid and ask prices will rise.
However, if they believe any news coming out for a financial instrument is negative, prices tend to fall, which will cause the bid and ask prices to decrease.

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Market makers assist in setting the bid and asking prices for financial assets. They will consider several factors to determine which prices they want to buy or sell a financial asset for, such as supply and demand, certain market conditions, as well as the health of a country’s economy.
Market makers also provide liquidity to the market, assisting in keeping price fluctuations to a minimum.

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During after-hours trading, the trading volume for certain financial assets is usually lower than on a regular trading day.
When the trading volume becomes lower during after-hours trading, there will generally be an imbalance between the bid and ask prices for these financial assets, which increases the spread, making it wider.

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