Bid vs Ask

A bid refers to the highest rate at which the prospective buyer of the stock is ready to pay for purchasing the security required by him. In contrast, the ask price refers to the lowest rate of the stock at which the prospective seller of the stock is ready to sell the security he is holding.

These bid vs ask options are vital for traders and, apart from stocks, are also used in forex services and derivatives trading. The difference in these spreads helps in determining the liquidity in the market. However, both rates independently do not make much sense and have to be used in coordination to understand the entire picture better.

The bid price is the highest amount of money a buyer is willing to pay for a particular commodity. Individuals and entities bid for various properties and securities from time to time, conveying the highest amount they are willing to pay to obtain ownership rights over them. While individuals are seen bidding in an auction, companies bid to ensure they crack different deals and gain project contracts.

Bids are done both online and offline via brokers or through an active channel. There are two parties involved – a seller, who puts forth the assets to bid for, and a buyer, who places relevant bids for securities.

An ask price is the selling price, the amount that a seller is willing to sell a security for. Investors are required to have a market order to buy at the current ask price and sell at the current bid price. In contrast to the selling price or the asking price, it is the amount that a seller is willing to sell a security for.

Investors are required by a market order to buy at the current Ask price and sell at the current bid price. In contrast, limit orders allow investors and traders to buy at the bid price and sell at the asking price.

The below image quotes the bid and ask prices for a stock Reliance industries, where the total bid quantity is 698,780, and the total sell quantity is 26,49,459.

Let's see the top difference between bid vs ask in stocks.

The asking price is always higher than the bid price, and the difference between them is called the spread. Different types of markets use other conventions for the spread. It reflects transaction costs and also liquidity. Bid-Ask Spreads increase in a volatile market or when the direction of the price is uncertain.

Spreads have been decreasing in the retail market due to the increasing use and popularity of exchanges and electronic systems. It enables small traders to get a competitive price, which only large players got in the past.

The blue-chip stock companies in Dow Jones Industrial have the bid Ask spread of a few cents while the small-cap stocks have the spread of 50 cents or over.

#1 Time-Specific: Both these rates are specific for a particular point in time and keep changing on a real-time basis. In the case of a stock market, the bid and Ask Rate change every second according to the current demand and supply. Therefore, these rates cannot be constant.

#2 Importance: These rates are only relevant when someone wants to buy or sell something. They help determine the demand for security and the value of the stock for a particular period.

#3 Liquidity: Help in determining the liquidity of the security

1. In the case of a stock, if one believes that the price is expected to go up, the buyer would buy the stock at a price that he believes is appropriate or fair. The buyer wants to buy the stock at this price is termed as a bid. In the future, when the prices go up, the buyer now converts into a seller. He will now quote a price to sell in which he believes maximum profit can be made. This price is termed the asking price.
2. There can be a case of multiple buyers bidding a higher amount. However, the same will not be applicable in the case of the asking price.
3. For example, bidder A is ready to pay ₹5000 for a commodity while bidder B offers ₹5700 for the same commodity. Both these bidders may be encountered with a bidder C, which may offer a price higher than this. Eventually, the bidder with the highest amount wins. It is extremely beneficial for the seller as the buyers are now pressured to go out to each other. Bidding is quite common in the case of art and unique or historical items. Such a scenario will not be possible in the case of an asking price or a seller.
4. Bid Price is known as the sellers’ rate because if one sells the stock, he will get the bid price. If you buy the stock, you will get the Ask Price. The difference between these two prices goes to the broker or the specialist that handles the transaction.
5. The bid price is usually quoted low and is also designed so that the exact desired outcome is achieved. Since the seller will never sell at a lower rate, the asking price will always be higher. For example, if the asking price of a particular commodity is ₹2000 and a buyer is willing to pay ₹1500 for the same, he will quote an amount of ₹1000. It may look like a compromise, and both parties will find a midway and agree to a price where they wanted to be from the beginning.
6. The spread will only be positive when the Ask price is greater than the bid price. A higher spread indicates the wide difference between the two prices. It makes it harder to generate a profit because the product or security will always be bought at a higher price and sold at a very low price.
7. On the buy-side, prices are always in decreasing order, and the topmost bid is considered the best bid price, and on the sell side prices are arranged in the increasing order, and the topmost ask price is considered the best ask price. Average of the best bid and average of the best ask price is considered the ideal price of the stock.