Hit The Bid

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21 Aug, 2024

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Hit the bid is a term used in finance and trading to refer to the act of selling a financial instrument or security at the current highest bid price. This term is commonly used in trading stocks, options, and other securities.

The goal of "hitting the bid" in finance and trading is to sell a financial instrument or security at the current highest bid price to exit a position or quickly capture profits. This strategy can be used in various market conditions, but it is often employed when a trader believes that the security price will likely decline soon.

Hit The Bid Meaning

Hit the bid" means selling securities or assets at the current highest price that buyers are willing to pay.
This term is often used in financial markets to describe a situation where a trader is looking to sell their assets quickly and is willing to accept the current market price.
The main differences between "lift the offer" and "hit the bid" are the direction of the trade and their impact on the bid-ask spread.

Hit The Bid Explained

Hit the bid involves selling a stock at the best bid price to finalize a transaction and instantly capitalize on market movements. The bid refers to the highest price a buyer is willing to pay for a security at a given moment. It is the opposite of the "ask price," which is the lowest price a seller is willing to accept for the same security. Hit is a term that means to execute or to take action. Therefore, when a trader "hits the bid," they agree to sell their security to the highest bidder at the current bid price.

This strategy is useful in volatile or fast-moving markets where traders must act quickly to execute trades and capture profits or limit losses. The bid price is determined by the highest bid offered by buyers in the market, and it can change quickly as buyers and sellers place their orders. If the market is volatile, hitting the bid can be a way for traders to execute trades quickly and capture profits or limit losses.

Examples

Let us look at a few examples to understand the concept better:

Example #1

Suppose a trader owns 1,000 shares of Company X, currently trading at $50 per share. The trader wants to sell the shares to exit their position and lock in a profit. However, they also need to sell the shares quickly because they need the cash for another investment.

At that moment, the current bid price in the market for Company X is $49.90 per share. The trader decides to hit the bid and place a sell order for their 1,000 shares at the bid price. This means the trader is willing to sell their shares to the highest bidder at $49.90 per share.

The sell order is executed almost immediately. The trader sells their shares for $49,900 (1,000 shares x $49.90 per share). The trader has successfully hit the bid and sold their shares at the current market price. This allows them to exit their position and lock in a profit quickly.

However, if the trader had waited a little longer, the bid price would have increased to $50.10 per share. If the trader had placed their sell order at this higher price, they would have received $50,100 for their shares, thus scalping $200 more than they received by hitting the bid.

Example #2

Another example is based on the stocks of Turquoise Hill Resources (copper stock) and Hollysys Automation Technologies (China tech stock). There were buy-out bids announced for these stocks. However, both stocks traded higher than the announced bid prices shortly after the announcements.

Reasons like the rising interest of potential buyers rising interest, the market uptrend, or the underlying asset's increased value might have contributed to the appreciation in the price. This scenario describes how market forces sometimes cause stocks to trade above-announced bid prices, providing potential opportunities for investors holding these stocks. This demonstrates the concept of "hitting the bid". Traders or investors may choose to sell their shares at the current highest bid price in the market, even if it exceeds the initially announced bid price.

Hit The Bid vs Lift The Offer

The differences between the two are as follows:

Basis	Hit the bid	Lift the offer
Meaning	"Hitting the bid" means selling a security at the current market bid price. It is used when a trader wants to sell a security quickly and is willing to accept the current market price.	Lifting the offer" means buying a security at the current market ask price. It is used when a trader wants to buy a security quickly and is willing to pay the current market price.
Strategy	The trader agrees to sell the security to the highest bidder in the market, who is willing to buy at that price.	The trader agrees to buy the security from the lowest seller in the market, who is willing to sell at that price.

Frequently Asked Questions (FAQs)

1. What is the opposite of hitting the bid?

The opposite of hitting the bid is "lifting the offer." Hitting the bid involves selling a security at the current highest bid price. Whereas, lifting the offer means buying security at the lowest asking price.

2. What are the risks of hitting the bid?

Hitting the bid carries certain risks for traders. One risk is the potential for price slippage. In such cases, the actual execution price may be lower than expected due to market fluctuations. Additionally, hitting the bid in illiquid markets can result in larger spreads between bid and ask prices. Subsequently leading to higher transaction costs for the trader.

3. Which type of traders commonly use hit the bid?

Hit the bid is commonly used by stock traders. It helps them sell a security quickly at the prevailing market price. Day traders and active traders who seek to capitalize on short-term price movements exhibited by securities often employ this strategy. Institutional traders and market makers may also use hit the bid to execute large orders while efficiently minimizing market impact.