Bid and Asked

Definition

Bid

A bid is the highest price that a prospective buyer is willing to pay for a security, commodity, or other asset at a given point in time.

Asked

The asked, also known as the ask price, is the lowest price that a prospective seller is willing to accept for the same security, commodity, or other asset.

Together, the bid and asked prices form a quotation, which represents the current price at which an asset can be bought or sold in the market. The difference between the bid and ask prices is known as the spread.

Examples

Example 1: Stock Market

In the stock market, if the bid price for a share of Company XYZ is $50, it means that buyers are willing to purchase the stock at $50 per share. If the asked price is $50.10, sellers are willing to sell it at $50.10 per share. The spread in this case is $0.10.

Example 2: Forex Market

In the foreign exchange (forex) market, assume the bid price for EUR/USD is 1.1200, and the asked price is 1.1210. This means traders are willing to buy euros at a rate of 1.1200 USD per euro and sell euros at 1.1210 USD per euro. The spread here is 0.0010 USD.

Frequently Asked Questions

What is the significance of the spread between the bid and asked prices?

The spread indicates the liquidity and transaction cost for trading the asset. A narrow spread usually implies high liquidity, meaning the asset can be bought or sold quickly with minimal price impact. Conversely, a wide spread suggests lower liquidity and higher transaction costs.

How are bid and asked prices determined?

Bid and asked prices are determined by market participants based on supply and demand. Buyers set their bid prices according to what they are willing to pay, while sellers set their asked prices according to what they are willing to accept.

Can bid and asked prices change frequently?

Yes, bid and asked prices can change continuously throughout the trading session due to market dynamics, including changes in supply and demand, economic news, or other events impacting the asset’s value.

What is a market maker?

A market maker is a firm or individual that actively quotes two-sided markets in a security by providing bid and ask prices. Market makers help ensure liquidity and orderly trading.

Why might the spread widen or narrow?

The spread can widen due to higher market volatility, lower trading volume, or uncertainty in the market. It can narrow during periods of high liquidity and stable market conditions.

Quotation

A quotation is the current bid and ask prices for a security or asset in a market.

Spread

The spread is the difference between the bid and asked prices. It represents the cost of trading and provides an indication of market liquidity.

Market Depth

Market depth refers to the quantity of buy and sell orders at various price levels in a market.

Liquidity

Liquidity is the ability to buy or sell an asset without causing a significant impact on its price. High liquidity typically corresponds to narrow spreads and active trading.

Market Maker

A market maker is a participant in financial markets that provides continuous bid and asked prices, ensuring liquidity by being ready to buy or sell at their quoted prices.

Online Resources

Suggested Books for Further Studies

“Market Liquidity: Theory, Evidence, and Policy” by Thierry Foucault, Marco Pagano, and Alisa Roell
“Trading and Exchanges: Market Microstructure for Practitioners” by Larry Harris
“The Economics of Financial Markets” by Roy E. Bailey
“Market Microstructure: A Survey of Microfoundations, Empirical Results, and Policy Implications” by Maureen O’Hara
“Options, Futures, and Other Derivatives” by John C. Hull

Fundamentals of Bid and Asked: Finance Basics Quiz

### What does the bid price represent in financial markets? - [ ] The median price of a security - [ ] The selling price in a transaction - [x] The highest price a buyer is willing to pay - [ ] The average trading price > **Explanation:** The bid price represents the highest price that a prospective buyer is willing to pay for a security or asset at a given time. ### What does the ask price represent? - [ ] The highest price a seller is willing to accept - [x] The lowest price a seller is willing to accept - [ ] The median price in the market - [ ] The average selling price in past transactions > **Explanation:** The ask price (or asked price) represents the lowest price that a prospective seller is willing to accept for a security or asset at a given time. ### What is the spread in financial markets? - [ ] The difference between the previous and current trading price - [x] The difference between the bid and asked prices - [ ] The average bid price over a period - [ ] The fluctuation in bid prices > **Explanation:** The spread is the difference between the bid and asked prices in the market. ### Why is a narrower spread typically more desirable? - [ ] It signals lower liquidity in the market - [x] It implies lower transaction costs and higher liquidity - [ ] It indicates higher risk for investors - [ ] It reflects slower trading activity > **Explanation:** A narrower spread typically implies lower transaction costs and higher liquidity in the market, making it more desirable for traders and investors. ### Which of the following entities typically provides continuous bid and asked prices to ensure market liquidity? - [ ] Retail investors - [ ] Government bodies - [ ] Central banks - [x] Market makers > **Explanation:** Market makers are firms or individuals that provide continuous bid and asked prices to ensure liquidity and facilitate orderly trading in financial markets. ### How can high market volatility affect the spread? - [ ] It typically narrows the spread - [x] It often widens the spread - [ ] It has no effect on the spread - [ ] It decreases both bid and ask prices equally > **Explanation:** High market volatility often leads to a wider spread due to increased uncertainty and trading risks in the market. ### Which combination of prices would indicate the smallest spread? - [x] Bid: $50.00, Ask: $50.10 - [ ] Bid: $49.50, Ask: $50.50 - [ ] Bid: $45.00, Ask: $50.00 - [ ] Bid: $48.75, Ask: $49.75 > **Explanation:** A bid price of $50.00 and an ask price of $50.10 reflects the smallest spread of $0.10. ### What directly determines the bid and asked prices in a financial market? - [ ] Government regulations - [x] Market participants' willingness to buy or sell - [ ] Historical average prices - [ ] Daily trading volume > **Explanation:** The bid and asked prices are directly determined by market participants' willingness to buy or sell the asset at specified prices. ### What can a wide spread indicate about a market or a particular security? - [ ] High liquidity and low risk - [ ] Low liquidity and low volatility - [x] Low liquidity and higher transaction costs - [ ] High frequency of trades > **Explanation:** A wide spread can indicate low liquidity and higher transaction costs in the market or for a particular security. ### Can bid and asked prices change during a trading session? - [x] Yes, they can change frequently. - [ ] No, they are fixed for the entire trading session. - [ ] Yes, but only once per session. - [ ] No, they only change after market hours. > **Explanation:** Bid and asked prices can change frequently during a trading session due to market dynamics, changes in supply and demand, and other influencing factors.

Thank you for exploring the detailed concepts of bid and asked prices along with tackling our specialized quiz questions. Continue enriching your finance acumen!