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Difference Between Bid and Offer
The bid rate is the maximum rate in the market that buyers of stock are willing to pay to purchase any stock or the other security they demand. Whereas, the offer rate is the minimum rate in the market, sellers are eager to sell any stock or the additional security they currently hold.
The difference refers to the bid-ask spread, and the narrower this spread, the more liquid the market for the concerned security/derivative. The bid-ask spread depends on the demand and supply of the concerned security/derivative.
When you plan to acquire a good, there is a price that you are ready to pay for the good. Such a price is said to as a bid in normal parlance. The term “bid” is popularly used in the stock market quote and refers to the price the buyer of the stock/derivative is willing to pay for the same. Thus, the maximum price the buyer or a group of buyers are ready to pay for a particular security/derivative buys quantity, also known as bid quantity.
Similarly, when you intend to sell a good, you would like to receive a minimum/lowest price from selling the good; such a price is referred to as offer/ask price in normal parlance. The term "offer price," also known as the ask price, refers to the price that the seller of the stock/derivative prefers to receive for the same. Thus, the minimum/lowest price the seller or a group of sellers intends to receive for a particular security/derivative sell quantity is also known as the offer quantity.
Both prices are necessary for a trade to execute and represent the demand and supply sides of the security/derivative they quote.
Example of Bid and Offer Price
The two-way price quote of TCS Ltd. on Nifty on 13.01.2019 at 10.40 a.m. is below.
As we can see, the stock of TCS is a highly liquid large-cap stock and forms part of the Nifty index, and as such, the spread is quite narrow, which would not have been the case in thinly traded securities illiquid counters. Thus, if an investor intends to buy 1,000 shares at the immediate market rate, they can buy them at the current offer rate of ₹2071.9.
Similarly, an investor who wants to sell the share immediately at the market rate can sell the same at the current bid rate of ₹2071.25.
The bid-offer spread is the difference between bid and offer rates, i.e., ₹0.65 (₹2071.9-₹2071.25). One may note that the best bid rate and best offer rate are only used at any time to determine the bid-offer spread.
Bid vs. Offer Price Infographics
Key Differences
- It is the price at which the buyer agrees to buy the concerned security or financial derivative. It represents the maximum price offered for the same. On the contrary, the intended seller's price to sell the concerned security or financial derivative represents the lowest suggested price. The bid price will always be lower than the offer price.
- The bid represents the demand side, and the bid price highlights the price set by the buyer. On the contrary, the offer represents the supply side.
- The difference in bid-offer price (spread) is narrow for liquid securities. This spread is quite wide in the case of illiquid and thinly traded security.
Comparative Table
| Basis | Bid | Offer |
|---|---|---|
| Meaning | It refers to the maximum price the buyer of the goods is willing to pay. | It refers to the lowest price the good seller is willing to accept instead of selling the goods. |
| Demand/Supply | The bid represents the demand for the good. Therefore, the higher the demand for the good, the higher the bid price. | The offer describes the supply of goods. The higher the supply of the goods, the lower the price. |
| Higher/lower | The bid price is always lower than the offer price. The rationale behind the same is that buyers always wanted to buy at lesser prices than the initial offer's price. | The offer price is always higher than the bid price. The justification for the same is that the seller always wants more for the goods offered for sale. |
| Seller and Buyer Price | The bid price is the seller's price, which means if a seller intends to sell the goods immediately, they will have to accept the bid rate. | The offer price is the buyer's price, which means if a buyer intends to buy the goods immediately, they will have to accept the offer rate. |
Conclusion
It determines the demand and supply side of a security/derivative and the price at which both matches result in a trade. The bid and offer rates keep changing during market trading hours and do not remain constant. Although the terms find their usage more in financial markets, the rationale behind the two finds its relevance in any exchange of goods.
The narrower the bid-offer spread, the more liquid the market is for security and vice versa. As a result, normally, small-cap stocks or thinly traded counters have a wide variation in their bid and offer quotes, whereas more liquid counters such as large-cap stocks and index constituents have a little variation in bid-offer quotes.
Both are important in executing a trade, and investors must be well versed with these terms. These are not the prices the investor needs to conduct a business, but they act as an important yardstick through which the investor can decide the price they would like to bid/offer. Similarly, by seeing the bid-offer spread, investors can determine whether it is worth risk-taking to buy/sell such security/derivative.
