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Bid Price

Bid PriceOn stock exchanges, there are several types of prices that are updated in real time: the bid, the ask, and the last prices. In this article, we are going to define the “bid price”.

What Is a Bid Price?

It is the highest amount that the buyer agrees to pay for currency, securities, and other assets. In stock practice, the current BP has typically considered the highest price with a pending purchase request at which anyone can sell their assets.

Bid vs Ask

The “bid price” term is often used as opposed to the “ask price” term. The mathematical difference between the two is called a spread. The bid-ask spread reflects the supply and demand for a specific asset.

The common features of the BP and AP are as follows:

  • Both reflect the asset’s liquidity.

  • Both are specific for a certain point in time and change in real time.

  • Both are relevant only when someone wants to buy or sell something. They help to identify the demand for an asset and the value of the stock for a particular time period.

The differences between the bid and ask are as follows:

  • The BP is the maximum price that the buyer is ready to pay for the asset whereas the AP is the minimum price the seller is ready to accept.

  • Sellers use the BP while buyers use the AP, and the bid is always lower than the ask.

  • The BP is typically higher than the current price whereas the AP is lower.

Bid prices are often used to extract a needed outcome from the asset that is making the bid. For example, if the ask price is $40 and a buyer wants to pay $30, they might make a $20 bid. Then they can compromise by agreeing to meet in the middle, i.e. at $30 - exactly what they wanted in the beginning.

When several buyers make bids, this can lead to a bidding war when two buyers make increasingly higher offers of the price that they are ready to pay. For example, a company may set an ask price of $5,000. Buyer A may offer $3,000, buyer B - $3,500, and buyer A - $4,000. This is quite beneficial to the seller because the buyers are eventually forced to pay a price higher than it would be if there was only one buyer.

Market orders require that the traders and investors buy at the current ask price and sell at the current BP. However, limit orders allow buying at the bid and selling at the ask, which brings the traders and investors a greater profit.

Bid-Ask Spread

Market makers can benefit from the bid-ask spread. For example, a market maker quoting a price of $10/$10.50 for security A confirms their wish to buy A at $10 (BP) and sell it at $10.50 (AP). As a result, the spread is $0.5, which is the market maker’s profit. The size of the spread varies depending on the market and the traded security. The spread can grow during the illiquidity periods because the buyers would refuse to pay a price above a specific threshold while the sellers would not want to accept prices below a specific level.

Summary

Together with the ask price and the last price, the bid price is one of the three key rates used on stock exchanges. It is the highest rate that the stock buyer is ready to pay for a certain security. The difference between the bid and the ask is called a spread, and market makers can benefit from that spread.