What is Bid and Ask Price?
Whenever you look for pricing information in markets such as stocks, options, Forex, futures, etc., you might witness the pricing information listed in three ways – the Ask price, the Bid price, and the last trade price. These three values provide a snapshot of a security’s current value and are constantly updated in real-time. This article elaborates on the Ask price meaning and what is Bid and Ask in the share market.
Definition of Ask Price
It is the lowest or minimum price at which a seller wants to trade his security. Most exchanges quote the lowest selling price in trading as the Ask price.
There is a Bid price that exists alongside the Ask price. It represents the maximum or highest amount a buyer can pay to purchase a security.
What is Bid and Ask Price?
Let us understand what is Bid and Ask in the stock market. The terms Bid and Ask to refer to the best possible price that prospective sellers and buyers are willing to transact at in the marketplace. The concepts of Bid and Ask are critical but often overlooked by retail investors. The current stock price represents the last traded price of the security. However, Bid and Ask to indicate the prices at which buyers and sellers want to enter a transaction. Therefore, Bid and Ask to represent the demand and supply for a particular security, respectively.
Suppose a current stock quotation includes a Bid of Rs. 50 and Ask of Rs. 51. It indicates that an investor looking to purchase a stock can do so at Rs. 51 while an investor who wants to sell the stock can do so at Rs. 50. Therefore, understanding the meaning of Ask and Bid is essential while trading in the stock markets.
Understanding Bid and Ask Price
Trade is typically executed for a buyer at the Ask price and the Bid price for sellers. The following illustration may give a better understanding of what is Bid price and Ask price are.
Let us assume an investor seeks to purchase shares of a company. The investor looks up the current share price which shows a value of Rs. 50. The Bid price for the security is Rs. 49, and the Ask price is Rs. 51. The investor plans to purchase 100 shares. According to his calculation, it would cost him Rs. 5,000 (100 shares at Rs.50 each). However, to his surprise, the amount debited is Rs. 5,100. It happened because the trade was executed at the Ask price, not the current share price.
The difference in values of the Ask prices and the Bid prices constitutes the Bid-Ask spread. When there is less difference in the spread, buyers and sellers are in tandem with the market movement. However, in cases where the Bid-Ask spread is substantial, it implies that one party has majority market dominance. A positive value of the spread indicates that sellers have the upper hand, and a negative value denotes buyers dominating the markets. Analysing the Bid-Ask spread helps traders form efficient trading strategies.
Conclusion:
The Ask price denotes the minimum price at which sellers are willing to sell their securities. Additionally, the bid price refers to the maximum price at which a buyer is willing to purchase securities. The difference between these prices represents the bid-ask spread and helps traders design more effective trading strategies.