What is the Bid and Ask Price? | Definition and Example

Bid and ask prices, which are also known as buying and selling prices, represent the best prices for a particular security at a given time. They are like bids from two parties – helping buyers and sellers agree on the best price.

Looking deeply into the meaning of bidding and asking will help you understand its relevance in financial transactions.

Bid and ask price in a nutshell

  • Bid price is the maximum a buyer offers; ask price is the minimum a seller accepts.
  • The difference between ask and bid price is called spread.
  • Close bid/ask prices indicate high market liquidity, making it easier for investors to trade.
  • Binary options do not have bid and ask prices; they have a fixed strike price for buying and selling.

What does bid and ask mean – Bid and ask definition

  • Bid price: The bid price is something that a buyer is ready to pay to acquire a security. It is the maximum price that the buyer will offer to the seller.
  • Ask price: The asking price is what the seller will take to sell his security. It is the minimum price acceptable to the seller. The seller will not accept a price below the asking price of the financial asset he is selling.

The bid and ask price distinction

The bid and ask prices have a difference. This difference is called the spread. You might have encountered the term spread while trading on various online platforms. 

While trading, spread holds very high relevance for traders. If the bid and ask price difference is relatively lower, the financial asset has a higher liquidity. 

On the flip side, if there is a huge contract between the bid and ask price, the liquidity of the financial asset is very low.

Bid and ask price example

This example will offer you the best knowledge to understand bid and ask prices. 

Suppose the current quotation of the stock of any company is $10 (bid price). Let us consider that a buyer is willing to acquire this asset at its current market price by paying $11 (ask price). Here, the seller can sell the shares he is holding at the current market price of $10. The contrast between the bid and ask price is the spread equivalent to $1.

Determination of bid and ask price

No single person determines the bid and ask price. It depends entirely upon the market forces. In reality, the bid and ask price depends entirely upon what people expect from the transaction.

The price determination works according to economic laws of demand and supply. For example, if the demand for security is more than its supply, the bid and ask prices will shift upwards. On the flip side, if the supply of the financial assets exceeds its demand, the bid and asked prices will go downhill.

What happens when bid and ask prices are close together?

Thus, When the bid and ask prices close together, it simply means that the market liquidity of the financial asset is ample. As mentioned, the lower the spread, the higher the liquidity of the financial asset.

It is one of the most favorable situations for traders or investors. It is because it gets easier for them to enter the trading market and exit anytime. Usually, traders use the closeness of bid and ask prices when they hold large positions.

Risk implications of wide bid-ask spreads

On the other hand, if your bid and ask price has a wide difference, it can be a situation where you will have to spend a lot of your time. Trading a financial asset with a high spread is also expensive. It carries a high risk, and a trader can lose money if he doesn’t trade wisely.

Thus, if you are into trading, you must choose an asset wisely. It would be best to choose only after checking the difference between the bid and ask price.

Is there a bid and ask price in Binary Options?

Binary options do not have bid or ask prices like traditional markets such as stocks. Instead, binary options have a fixed price, the so-called strike price, which applies to both buying and selling. This price represents the value of the underlying asset at the time the transaction is entered into.

Traders engage by predicting whether the price of the asset will be higher or lower than the strike price when the option expires. The payouts are fixed upfront – either a fixed amount or zero – depending on the accuracy of the prediction.

While there are no bid and ask prices, binary options trading still focuses on identifying entry points and predicting future price movements.

About the author

Percival Knight
Percival Knight is an experienced Binary Options trader for more than ten years. Mainly, he trades 60-second trades at a very high hit rate. My favorite strategies is by using candlesticks and fake-breakouts

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