Bid and Ask

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Bid and Ask

What they are

The bid and ask make up a two-sided price quote for a security:
* Bid: the highest price a buyer is currently willing to pay.
* Ask (or offer): the lowest price a seller is currently willing to accept.
The difference between them is the bid-ask spread.

How it works

When you view a live quote you’ll typically see something like 10.50 / 10.55. That means:
* A seller placing a market order will receive the bid: $10.50.
* A buyer placing a market order will pay the ask: $10.55.
The spread ($0.05 in this example) is effectively an implicit trading cost for market takers.

Who sets prices and who benefits

  • Market makers (or liquidity providers) post bids and asks and profit from the spread when they buy at the bid and sell at the ask.
  • Most retail traders are market takers: they buy at the ask and sell at the bid, accepting the spread as a cost.

Spread and liquidity

  • Narrow spread: indicates high liquidity and heavy trading activity (common for large, blue‑chip stocks). Lower transaction cost to enter/exit positions.
  • Wide spread: indicates low liquidity, higher trading costs, and greater price movement risk (common for small‑cap stocks or illiquid markets).
    Spreads can widen sharply during market stress or thin trading.

How bid and ask prices move

  • Prices shift based on supply and demand: rising bids/asks when demand exceeds supply; falling bids/asks when supply exceeds demand.
  • Overall trading volume and the number of active participants largely determine the spread size.

Practical implications for investors

  • Expect to sell at the bid and buy at the ask unless you use limit orders to target specific prices.
  • For large orders, narrow spreads and deeper order books reduce execution cost and market impact.
  • Monitor spreads for signs of liquidity problems or elevated transaction costs.

Bottom line

The bid and ask are the basic components of market pricing. The bid is the best price available to sell, the ask is the best price to buy, and the spread is an indicator of liquidity and an implicit trading cost. Understanding these concepts helps you evaluate execution costs and market conditions before trading.