Bid and Ask Definition, How Prices Are Determined, and Example

Only you can decide if you want to buy a stock, currency, or asset at the bid or ask price. The bid price and ask price simply represent the highest current buy order price and the lowest current sell order price respectively. They each change in real-time as the exchange or market makers broker deals and fill transactions.

The bid represents the highest price someone is willing to pay for a share. Conversely, if supply outstrips demand, bid and ask prices will drift downwards. The spread between the bid and ask prices is determined by the overall level of trading activity in the security, with higher activity https://www.bigshotrading.info/blog/moving-average-what-do-you-need-to-know/ leading to narrow bid-ask spreads and vice versa. The difference between bid and ask prices, or the spread, is a key indicator of the liquidity of the asset. The term “bid” refers to the highest price a buyer will pay to buy a specified number of shares of a stock at any given time.

Market Indicators

For example, if an investor wants to buy a stock, they need to determine how much someone is willing to sell it for. They look at the ask price, the lowest price someone is willing to sell the stock for. The ask price is the price that an investor is willing to sell the security for.

As we can see here, in-the-money calls and puts have the widest bid-ask spreads (approximately $0.50 for the deep-in-the-money options). The options with the narrowest bid-ask spreads are the at-the-money options (strike prices near $205), and the out-of-the-money options. However, it’s worth noting that the out-of-the-money options have narrower bid-ask spreads because the option prices are cheaper (a $0.05 option couldn’t have a $0.50 bid-ask spread). Lastly, the put option has a bid-ask spread of only $0.05, which is considered to be a narrow spread. In the case of buying at the asking price and selling at the bidding price, a trader would only lose $5 per contract. Before we get into bid size vs ask size, let’s first review a few other important measures of option liquidity in financial markets.

Financial Markets

To enable spread display in MetaTrader 4, you need to right-click on the ‎Symbol | Bid | Ask field. After that, a column with the current price spread for a particular security will appear to the right of the Ask price and will be marked “‎! In the MetaTrader terminal, bid vs ask you can call the Market Watch menu using the keyboard shortcut Ctrl + M to calculate the bid ask spread. Not investment advice, or a recommendation of any security, strategy, or account type. Learn more about the potential benefits and risks of trading options.

• The bid/ask spread is the difference between the bid and ask price.
• The bid is the price a buyer is willing to pay for a security, and the ask is the price a seller is willing to sell a security.
• In summary, the spread is the difference between the buy (ask) and sell (bid) price quoted on your trading platform and is payable on opening and closing a position.
• The trader should take into account the bid ask spread so that he/she can use pending orders and enter trades at the most favourable prices.
• The following visual explains what the bid and ask prices represent.

For example, consider a stock with a bid price of $100 and an ask price of $101. If an investor places a market order on this stock, they will purchase the stock at $101. Thereafter, let’s assume that the stock rises 3%, where the bid price moves to $103 and the ask price moves to $104. If the investor decides to sell their shares through a market order, they will receive $103. The investor’s profit per share is $2, even though the stock price rose by $3. The $1 of profit leakage reflects the $1 bid-ask spread on this stock.

Options Trading Strategies

Let’s look at what happens in detail when Joan sells her stocks. Joan tells her brokerage firm to sell 100 shares of XYZ at a price of $9.25 per share. Bill, who is also a customer of that brokerage firm, issues a buy order for 100 shares of XYZ at a price of $9.30 per share.