Bid and Ask Price | Trading Definition

Have you ever wondered how the actual trading price (buying or selling price) of each share of a particular stock is determined? If yes, keep on reading as in this article, we will share with you what the Bid vs. Ask price is.

Moreover, the actual price at which the trading for a particular stock takes place at a specific time is determined by the Bid Price and Ask Price. Below, we have briefly explained everything that you need to know about this topic.

Bid Price vs. Ask Price

The maximum price at which a buyer is ready to buy shares of a particular stock or security at a specific time is referred to as Bid Price. Meanwhile, the minimum price at which a seller is ready to sell shares of a particular stock or security at a specific time is referred to as Ask Price.

Generally, the Bid Price is lower than the Ask Price. Rare will be the cases in which both of these prices will be the same. Moreover, there are times when multiple or a large number of buyers are bidding for a higher amount. However, such cases are not possible with the Ask Price.

Definition

Bid: Maximum price the buyer is willing to pay for a security

Ask: Minimum price the seller is willing to receive

Range

Bid: This rate is usually always higher than the current price

Ask: This rate is generally lower than the current price

Users

Bid: Sellers use Bid rate

Ask: Buyers use Ask rate

Value

Bid: Bid Price is always lower than the Ask Price

Ask: Ask Price is always higher than the bid rate

Status:

Bid: These are the highest bids currently, and there are others online with lower bids

Ask: These Ask prices are the lowest presently asked and there are others in line with higher Ask prices

How A Trade Actually Takes Place?

When the seller and buyer agree at a price, a trade takes place for that particular stock. In other words, the point of time at which the bid price and ask price match with each other is the point at which the trade actually occurs. Moreover, that trading price is always equal to or lower than the Bid Price and equal to or higher than the Ask Price.

Bid-Ask Spread

The difference or gap between the bid price and ask price for a particular stock at a specific time is called Bid Spread. When the Ask Price is higher than the Bid Price, only then the spread can be positive. And, it is mainly the Bid-Ask Spread which indicates the liquidity for a particular stock.

Moreover, the size of this spread is inversely proportional to the liquidity of the stock. Further, the smaller the spread, the better will be the liquidity and vice-versa. Also, if the Bid-Ask spread is zero, the asset or stock will be totally frictionless.

The Bid Price and Ask Price are applicable not only in trading of stocks but also in the trading of currencies, bonds, and other securities. Hopefully, after reading this article, you will have a clear understanding of the difference between both of these two terms.