For every possible trade, you first need to learn about the terms and essential foundations of that trade. This foundation ensures you are ready to take on the deals and make fewer mistakes along the way.
Without this foundation, you cannot move ahead and succeed in the trade. Similarly, there are two very important terms used in the investment world: bid and ask.
The whole world of investment revolves around these two terms. Therefore, it is essential to know what these terms mean and what the major difference between them is.
Bid vs Ask
The main difference between the bid and ask is that bid refers to the maximum price the buyer is willing to pay for the asset or security.
Ask price is defined to be the lowest price an agent is willing to accept for the asset or product he wants to sell. If you subtract the asking price from the bid price, then this is called the bid-ask spread. The other differences between the bid and ask price are shown in the comparison table below.
Comparison Table Between Bid and Ask (in Tabular Form)
| Parameter of Comparison | Bid | Ask |
|---|---|---|
| Definition | The maximum amount a buyer is ready to offer for a product. | Lowest amount a seller is ready to acquire for a product. |
| Users | Sellers use the bid price. | Buyers use the asking price. |
| Value | The bid price is always lower than the asking price. | The asking price is usually greater than that of the bid price. |
| Multiple persons | Possible multiple buyers are willing to pay higher bid prices. | Not applicable in ask price. |
| Range bound | The bid price will be mostly higher than the stock value in the market. | The asking price will be mostly lower than the stock value in the market. |
What is Bid?
The bid price is the maximum amount the buyer is ready to offer for the product or asset.
For example, you want to purchase 10 shares of stock in a company for 100$. You set your bid price for each share as 10$. Now, this is the maximum amount you are ready to grant for the share.
Bid prices have a huge effect on the market value of the stocks. If the difference between the bid price and the asking price is greater, then it is not a good time to buy a product.
Suppose you want to sell your lemonade and so put up a stall for this purpose. But it is the winter season. This is not a good time for selling your lemonade.
The customer is only willing to pay 1$ for the glass of lemonade while originally you sell it at 5$. So, because of the greater bid-ask spread, the customer has the advantage in terms of the bid price.
You might have heard about bid auctions. Basically, in bidding auction, multiple buyers compete with each other to pay for the larger amount than the other party to get the product.
This is also known as the bidding war. Political situations also have a huge impact on bid prices. So in these uncertain times, buyers usually avoid buying assets.
But if they necessarily have to buy, then they lower their bid prices to accommodate for the economic instability.
So, the stock exchange market acts like an auction where the traders, government, and the corporations buy and sell their assets. If you are willing to buy an asset as soon as possible, then you can place an order called the market order. This means that you will accept any price the market hands you.
What is Ask?
Ask price is the lowest amount of money a seller is ready to acquire for the product or asset.
In the example we discussed above purchasing stocks, the buyer can only buy each share for 10$ if the seller is willing to accept 10$ for each share as the asking price.
Several factors can affect the ask prices. If the market situation is good, you would most likely be able to sell at your ask price because many buyers would be willing to buy it at that time.
Similarly, if the economic condition of the country is good, the bid-ask spread is minimum and the sellers can have their desired ask prices.
Often, there are also times when the prices are going up and down in an unpredictable manner. This situation is called volatility.
It is also a bad indicator for ask prices since you have a hard time setting the price and predicting the market situation.
There is another very important concept in the bid-ask spread knows as liquidity of the assets. It just means that you as a seller have a high chance to set your ask price if the bid price and ask price are closer to each other.
The more liquid your assets are, the higher the chance of increasing your ask price. But if there is a person who is willing to pay the asking price as set by the seller originally and the bid-ask spread is also high, then this phenomenon is called “crossing the spread”.
Main Differences Between Bid and Ask
Some of the features that differentiate between Bid and Ask prices are given below:
- The bid price is the maximum amount a buyer is willing to pay for a product while the asking price is the lowest amount a seller is willing to accept for a product.
- Sellers use the bid price while buyers use the asking price.
- The bid price is always lower than the asking price while ask price is usually greater than the bid price.
- Possible multiple buyers are willing to pay higher bid prices in a bidding war for a product. This is not the case in ask price.
- The bid price will be mostly higher than the stock value in the market whereas the asking price will be mostly lower than the stock value in the market.
Conclusion
Understanding the difference between the two terms is as significant as stepping into the world of investing.
Not only this, but it is also essential to know the factors that affect them which in this case is market size, political situations, economic instability, etc.
The world of investment can be confusing and complex at times due to uncertain conditions. But if we grasp the concept of the bid and ask prices, it can make things a lot easier for us.
References
- https://2ndave.nyu.edu/bitstream/2451/26956/2/wpa98041.pdf
- https://www.krannert.purdue.edu/faculty/mcconnell/publications/PublicationsPDFS/An….Stock%20FM%20Sum1997%20V26%20N2%2018-34.pdf