How to find the bid vs. ask price

What is the bid price? 

The bid price is the highest price a trader is prepared to pay to open a long (buy) position on an asset. Those looking to profit from a long position will purchase said asset at the bid price and hope that it rises to where the ask price is higher than the bid price you accepted when selling your position back into the market. 

When a bid order is entered, there is never a guarantee that the trader will receive the number of shares, lots or contracts at the requested price. It ultimately boils down to liquidity. There must be sufficient sellers at the bid price for buyers to have their orders filled. 

Bid price examples 

Let’s say the current bid price on an equity stood at $5.10. You may decide to submit a limit order and purchase your shares immediately at a bid price of $5.10. Alternatively, if a limit order is entered at $5.05, this price will only be taken if all other bids above it are filled to enable the bid price to drop five ticks. 

A limit order allows you to choose your entry point instead of accepting the current market price. A limit order can narrow the bid-ask spread. If the bid price was $5.10 and the ask price was $5.13, you could look to enter a long position at $5.11 and wait for your order to be filled. 

Bid exit examples 

If you plan to hedge out of an open ‘long’ (buy) position on a security, or you’re just looking to short-sell it outright, it’s possible to sell at the best available bid price, providing there is a buyer on the other side of the market. 

You can use limit orders to place short bid at, below and above the current bid price. A bid above the current bid price will, as we’ve already discussed, likely narrow the bid-ask spread. Market orders can also be used by those willing to accept whatever price is immediately available to sell an asset. A short-sell market order is most often utilised when a trader is sure that the value of an asset will fall much further or when a trader is keen to exit a position fast. 

What is the ask price? 

The ask price is the cheapest price at which a trader is prepared to sell an asset, at least for the current time. Just like the bid price, the ask price fluctuates throughout a trading session. The ask price is usually a solid barometer of a stock’s market value at any point, although you still cannot rely solely on the ask price to define an asset’s ‘true’ value. 

As with a bid price order, you cannot guarantee that a short-sell order will be filled at the current ask price. It all depends on how many shares, lots, or contracts that a buyer is prepared to accept at the latest ask price. 

Ask price examples 

If a current asset’s ask price is set at $5.15, you may wish to submit a limit order to short-sell said asset at $5.15 or anywhere above that figure. However, if a buy order is entered with a limit of $5.18, all other offers beneath that figure, starting with $5.15, will have to be filled before the price moving up to $5.18 and being filled. 

Any order placed beneath the current ask price will narrow the bid-ask spread or it may even directly take the bid price, as both sell and buy orders are simultaneously matched. Those looking to directly short-sell an asset can set a market order at $5.15 and even if the price falls to $5.14 or even $5.13 their order will be automatically filled. 

How are bid and ask prices set? 

The bid price and ask price is defined by the market, as opposed to any specific individual or organisation. Effectively, it is the market forces of supply and demand. Whenever demand outstrips supply, the bid and ask price of an asset will move steadily upwards. When supply begins to outstrip demand, the bid and ask prices will gradually decline. 

The gap between bid and ask prices, known as the ‘spread’ – more on this shortly – is defined by the level of trading activity on the asset. The greater the trading volumes, the narrower the spread and the thinner the volumes, the wider the spread. 

The crucial differences between bid and ask prices 

• Using the example of an equity, if you feel that the value of a stock is likely to rise, you will purchase the equity at a value you think is fair. As a buyer, you’ll buy the equity at the price described as the ‘bid price’. When you decide to close your open position to liquidate your entry, you will become the seller. You’ll then be required to quote an ‘ask price’ to sell and generate the maximum return on your initial investment.

• More than one buyer can bid a higher amount than the bid price. Sellers can’t quote lower than the ask price, as the order will simply execute at the lowest possible price.

• The bid price is known in the market as the ‘sellers’ rate’. That’s because if a trader sells as stock, they will get the latest available bid price. If a trader buys a stock, they will get the latest available ask price. The difference between the two prices is the spread or margin which is paid to the broker handling each trade.

• On the buy side of the market, available prices are always shown in decreasing order. The top price is always deemed the best possible bid price. On the sell side of the market, available prices are always shown in increasing order. The top price is always deemed the best possible ask price. Consequently, the average between the best available bid and ask price is deemed the ideal real-time value of an asset. 

The main similarities of bid and ask prices 

• Both the bid price and the ask price are time-specific. They show the price to buy and sell a security at a set point in time. The bid and ask prices subsequently change in real time. With the financial markets, the bid and ask price of an equity can change every second, based on the weight of money towards demand or supply. The rate of change is not constant. It is intrinsically linked to trading volumes.

• Both the bid and ask price are only important to traders when an individual plans to buy or sell an asset. They help to quantify the demand for a security and the value of the stock for a period. 

What is the bid-ask spread? 

A bid-ask spread is the gap between the highest price a buyer is prepared to pay for an asset and the cheapest price a seller is willing to sell an asset. The spread is considered the transaction cost for a retail trader. Buyers purchase at the available ask price and sellers sell at the available bid price. 

Essentially, the bid price demonstrates the demand for an asset, and the ask price represents the supply of said asset. 

Market makers are those that purchase at the current bid price and sell at the current ask price. Market makers are typically deployed by brokerages to buy and sell securities at specific prices. When a retail trader initiates a trade, they will accept one of these prices, based on whether they plan to buy (ask price) or sell (bid price) the asset. 

The difference between the two is known as the spread and is retained by the market makers as their commission for facilitating market liquidity. 

Let’s say the bid-ask spread on an asset was $0.50 – the bid price was $19.50 and the ask price was $20. 

The bid-ask spread in percentage terms is $0.50 / $20 x 100 = 2.50%. The wider the spread, the more expensive a trade is, whichever side of the market you wish to enter. 

What causes bid-ask spreads to be wider than others? 

The size of a bid-ask spread differs from asset to asset. Typically, it is defined by the liquidity of each asset. The more liquid a market, the narrower a bid-ask spread is likely to be. The forex markets are said to have the tightest bid-ask spreads. 

Some of these spreads can be as thin as 0.001%, on occasion. At the other end of the spectrum, some lesser-known small-cap stocks can have spreads of upwards of 2% of an asset’s lowest available ask price. 

The wider spreads often occur because there is simply a lower level of demand from investors. Small-cap stocks that have much less information surrounding them carry more inherent risk and therefore investors may be warier to invest and take the plunge. 

The price volatility surrounding lesser-known stocks or fledgling cryptocurrencies also means that market makers demand bigger spreads to make it worth their while to provide liquidity to the market. 

Is the last price the same as the current bid-ask prices? 

While the bid price focuses on the highest price a trader is prepared to pay to go long (buy) on an asset and the ask price is the lowest price a trader is prepared to short (sell) an asset, the last price is essentially the value of the most recent transaction of said asset. 

It’s possible to think of the last price definition in terms of selling any other asset. Let’s say you choose to sell your vehicle for $20,000. You get an offer of $17,500 but, following negotiation back and forth, the car is finally sold for $19,000. 

The last price is the price of the last transaction, i.e. $19,000. It may not be the price you wanted to sell at, but it’s the actual price a buyer was prepared to pay. 

Remember, the last price is not always an accurate representation of the price available to buy or sell in the market in real-time. The last price may have been taken before a significant shift in the bid or ask price, which, as we’ve already explained, can occur for a multitude of reasons, not least a fall in liquidity and/or market uncertainty. 

The latest bid and ask prices are therefore a more accurate representation of the market value of an asset at that moment. The last price simply shows the price where buyers and sellers were most recently matched in the market.