Ask Price Vs. Bid Price: What’s The Difference?
The two fundamental terms in the market are bid and ask price. These two represent the supply and demand for the stock and apply to any security you buy or sell. It is therefore essential to understand them.
In simpler terms, the bid price is the maximum amount the buyer is willing to pay for the security. The ask price is the minimum amount the seller is willing to sell the security.
This is the difference between the bid price and the ask price for a particular security. For example, if you are willing to sell the security at $20, but the buyer wants to buy it at $15, the spread is $5.
Some buyers pay the bid price for a security. When this happens, despite the bid-ask spread, it is referred to as crossing the spread.
What Role Does Bid And Ask Price Play In Trading?
When making a trade, the investor places an order with the broker. The trader proposes their sell price, which is the ask price. The broker offers their buying price, which is the bid price.
The security can only be sold if the ask price and the bid price matches. The trade can fail to happen if the bid-ask spread does not match. Also, a big difference between the bid and ask price of security indicates not much trading has been happening.
The wide bid-ask spread is a disadvantage to the seller because buyers might not be willing to purchase the stock. Besides, the narrower the bid-ask spread, the easier it is to sell the security.
A narrower bid-ask spread is also an advantage to the seller because it indicates a lot of trade in the specific security. Therefore, you are exposed to fewer risks as investors.
Factors Affecting Ask Price And Bid Price
Here are some of the things that affect the bid and ask price when it comes to trading.
The market price of a security can affect the bid-ask spread. For example, if the market price is too high, the seller will quote a high bid price.
A big market with trading volume that happens daily for specific security will have a narrower bid-ask spread. For example, if more than one hundred people demand particular security, you will be able to sell it to liquidate your shares.
Contrary, if the demand for the commodity is low, you are less likely to sell securities at a high price. The bigger the market size, the narrower the bid-ask spread and the more liquid your stock will be.
The more volatile the security is, the wider the bid-ask spread. When commodity prices keep fluctuating, it becomes harder for market markers to set the ask and bid price.
Political And Economic Uncertainty
Political and economic uncertainty affects the trading world. When people cannot predict what tomorrow will bring, they are more careful with their investments. Sellers don’t sell securities, and buyers don’t spend their money on securities.
Also, sellers will not drop their ask price, and buyers are not willing to raise their bid price due to the uncertainty of the economy. This affects trading and can cause a widening in the gap of a bid-ask spread.
Time Of The Day
The market is open between 9:30 a.m. and 4 p.m. from Monday to Friday. Most traders trade in the opening hours of the market and at the close. Meaning, during the day, less trade takes place, so the stocks are less liquid.
When stocks are less liquid, the bid-ask spread is wider than in the morning and at the end of the market day.
Catalysts in the stock market affect ask and bid prices. The catalyst can be an article, a company’s announcement, or a spreading rumor about trading. If the information favors the stock market, many people will buy stocks and securities.
The information could also be about the sale of securities, which could increase the sell orders. This makes the prices go up or down and can lead to a change in the bid-ask spreads.
More traders participate in the market, meaning there is liquidity. However, other times, the catalyst could result in significant volatility that will lead to widening of the bid-ask spread gap.
Bid Price Vs. Ask Price: The Difference
Now, let’s turn our attention to the differences between the bid price and the ask price.
Bid price is the largest price that the buyer is willing to pay for a security or a commodity. Ask price represents the lowest amount of money the seller is willing to sell the security.
The buyer is willing to pay the bid price because the buyer considers it fair. When they want to sell their stakes in the future, they will quote a higher price than the one they bought the commodity for to make profits. The new price they quote will be the ask price.
Range-Bound With Market Price
The bid price has a higher rate when compared to the market price of the stock. This is contrary to the ask price because its rate is usually below that of the market price.
Which One Is Higher
The ask price is always higher than the bid price. It is found on the right side of the quote, while the lower bid price is always the left one quote. However, the bid price is higher than the market price because the seller should make a profit.
What They Represent
The bid prices are the highest prices and match lower bids. On the other hand, the ask price represents the highest ask at the moment, and it’s a sign there will be higher bids in the queue.
Who Uses Them
Sellers of the stock use bid prices. Anyone selling the security should get the bid price, while those purchasing the security get the ask price.
The Broker’s Perspective
Brokers use the bid price as their selling price, so they tend to get the most from their buyers. They purchase the commodity using the ask price and ensure it is as low as possible to profit when selling the item or security.
How The Bid-Ask Price Is Determined
The two common market forces, demand and supply, determine the bid-ask prices. Supply is the quantity of a specific security in the market, and demand is the willingness of investors to buy the securities at a particular price.
The bid-ask spread shows the levels at which the buyers will buy securities and sellers will sell them. A tight or constricted bid-ask spread shows how liquid the commodity has been.
A wide bid-ask spread is a sign that the security has not been liquid. Therefore, the gap between demand and supply of security will play a significant role in defining the difference between buying and selling. The bigger the gap, the bigger the spread.
For a trade to happen, there must be a buying and selling price. The two prices are determined by supply and demand. The bid and ask price are the amounts the buyer is willing to pay for security and the amount the seller can sell at, respectively.