Definition Bid Ask

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In that sense, you buy at the ask price, and the seller sells at your bid price. The bid price is the highest price that a trader is willing to pay to go long at that moment. Prices can change quickly as investors and traders act across the globe.

spread trade
buyer and seller

On the other hand, if the spread is wider, it indicates a significant difference in the opinion of sellers and buyers. As stated above, the difference between ask and bid prices becomes the profit for those who sell the stocks. Hence, understanding how it is computed is an important aspect of trading. Furthermore, as the bid-ask spread helps assess market liquidity, booking profit at the right time becomes easier for investors.

The higher the bid size, the more shares traders are willing to buy at that price. A very liquid market for any security is required, or there may be no optimal exit point to book profit in a spread trade. Demand-supply friction should be present in that security, as this increases the odds of a wider spread. The depth of the bids and asks can affect the bid-ask spread significantly. When fewer market players place limit orders to purchase an asset or fewer sellers place limit orders to sell, the spread may widen dramatically. However, bond quotes are often given in terms of yield rather than price, because the yield tells the expected return on the bond through maturity.

With an instrument like SPY, that’s not a concern because the spread is so tight, but with other instruments with a wide spread it’s crucial to get a good fill price. When looking at a particular instrument for trading, it is important to check the bid-ask spread. Wide spreads can increase the costs of trading in that instrument via something referred to as “slippage”. Another factor that highly affects the bid-ask spread is market volatility. When the market undergoes frequent fluctuations, the spread widens. Maintaining independence and editorial freedom is essential to our mission of empowering investor success. on the left, asks on the right, with a bid–ask spread in the middle. By definition, the ask price will always be higher than the bid one. The numerical difference between the bid and ask is called the bid-ask price spread. On the other hand, the ask price will be lower than the current market price. Imagine you are trading a stock that is going against you tremendously, but every time you place your sell limit order it drops by 1% before your order is executed. Now, if you are buying a thousand shares for example at market, you may fill at multiple price points if the ask continues to rise.

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The initiating the transaction is said to demand liquidity, and the other party to the transaction supplies liquidity. Liquidity demanders place market orders and liquidity suppliers place limit orders. For a round trip the liquidity demander pays the spread and the liquidity supplier earns the spread. All limit orders outstanding at a given time (i.e. limit orders that have not been executed) are together called the Limit Order Book.

That’s when a stock is trading at a price with above-average significance. Sarah’s trading edge is mainly in low float stocks that have low trading volume. So it’s super-important that she keeps an eye on the liquidity of the stocks she’s trading. She doesn’t want to get caught in a trade where she can’t exit quickly. When the bid and ask are close to the same amount, it means there’s volume and liquidity in the stock. It also means there won’t be such dramatic price swings with each buy and sell.

buying and selling

The simple way of thinking about the ask is the price you are willing to sell the security. The bid and ask are the prices that govern all trading activity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. This could be a news article, an SEC filing, a company announcement, or even just a widely spread rumor.

Can I Buy a Stock Below the Ask Price?

The last price is the most recent transaction, but it doesn’t always accurately represent the price you would get if you were to buy or sell right now. The last price might have taken place at the bid or ask price, or the bid or ask price might have changed as a result of, or since, the last price. The ask price refers to the lowest price a seller will accept for a security.

Different types of markets use other conventions for the spread. It indicates the slight difference between the bid price and the ask price. On the contrary, the wider spread reveals the less liquid status of the market. The average spread for S&P 500 stocks is around 13% to 18%.

It is best to pick a broker with zero or low spreads, to keep trading costs at a minimum. It is also possible to place bets on spreads, but not all brokers allow spread betting. A spread trade’s range is exclusive to that single security market, and it’s not the same for all. If a stock’s bid price is $24 and its ask price is $25, then the bid-ask spread for that stock is $1. It can also be expressed as a percentage of the lowest sell or ask price.


Depending on their perspective of profit, they choose either of the two. However, no matter which bid-ask spread options they choose, the difference between the ask and bid prices would be the profit of the market makers who offer the deal. Most quotes in securities markets are two-sided, meaning they come with both a bid and an ask. The bid is the highest price at which someone is willing to buy the security, the ask or offer is the lowest price at which someone is willing to sell it. Together, the bid and ask make up the price quote, with the distance between the bid-ask spread an indicator of a security’s liquidity . Quotes will often also show the amount of the security available at both the current best bid and ask prices.

My top student Mark Crooke has evolved into an options trader. Check out what he’s learned in this webinar and how you can learn from him. For more in-depth information on market basics, check out my free penny stock guide. But it can be anything — a house, a car, or a share in a company. Volatility profiles based on trailing-three-year calculations of the standard deviation of service investment returns. Bid-ask spreads will widen when volatility picks up and the market starts moving quickly.

Understanding Bid-Ask Spreads

The ask price is the lowest price that someone is willing to sell a stock for . Similar to all other prices on an exchange, it changes frequently as traders react and make moves. The ask price is a fairly good indicator of a stock’s value at a given time, although it can’t necessarily be taken as its true value. The bid price represents the highest-priced buy order that’s currently available in the market.

Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. The last price represents the price at which the last trade occurred. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.

  • This data is using 45 day to expiration SPY options from September 2, 2020.
  • Bid-Ask SpreadsThe asking price is the lowest price at which a prospective seller will sell the security.
  • The bid price is usually quoted low, and since a seller will never sell at a lower rate, the ask price will be higher.
  • In contrast, the ask rate is the lowest rate, the prospective seller of the stock is ready to sell the security.

Bid prices refer to the highest price that traders are willing to pay for a security. The ask price, on the other hand, refers to the lowest price that the owners of that security are willing to sell it for. If, for example, a stock is trading with an ask price of $20, then a person wishing to buy that stock would need to offer at least $20 in order to purchase it at today’s price.

Was ist die Bedeutung von Bid und Ask beim Handeln an der Börse?

Even though it’s the same car you bought a month ago with only 500 miles on the odometer, to buyers it’s not worth as much as something brand new. This is a really important factor to consider when trading. Every expert will tell you the minute you pull off the lot you lose thousands of dollars in resale value. If you are looking to buy into a stock using a market order, you will fill at the ask price. This is the dance which is played on all exchanges around the world – millions of times per day.

Instead, we recommend you use a “limit order,“ which allows you to choose the entry point. Hi David, If it’s a spread trade and I’m not getting a fill on the limit order, I will break up the legs and execute them individually. If you’re having trouble getting filled on single orders, that could be a broker issue. One point worth noting here is that the very far out-of-the-money options will naturally have a tighter spread. For example, options that are trading for only $0.05 or $0.10 shouldn’t have a $1.00 spread.

Bid-Ask Spread Explained

By contrast, markets for certain corporate bonds are less liquid and carry wider bid-ask spreads. We’ll also scrutinize different stocks to see which have wide bid ask spreads and why that can have a negative impact on your trading. Best Ask PriceThe ask price is the lowest price of the stock at which the prospective seller of the stock is willing to sell the security he holds.