Difference Between Bid and Ask Price of Stock

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The bid price is the highest amount of money a buyer is willing to pay for a particular commodity. In contrast to the selling price or the asking price, it is the amount that a seller is willing to sell a security for.

Investors are required by a market order to buy at the current Ask price and sell at the current bid price. In contrast, limit ordersLimit OrdersLimit order purchases or sells the security at the mentioned price or better. In the case of sell orders, it will be triggered at a limit price or higher, whereas for the buy orders, it will be triggered only at a limit price or lower.read more allow investors and traders to buy at the bid price and sell at the asking price.

The below image quotes the bid and ask prices for a stock Reliance industries, where the total bid quantity is 698,780, and the total sell quantity is 26,49,459.

What is Bid-Ask Spread?

The asking price is always higher than the bid price, and the difference between them is called the spread. Different types of markets use other conventions for the spread. It reflects transaction costs and also liquidity. Bid-Ask SpreadsBid-Ask SpreadsThe asking price is the lowest price at which a prospective seller will sell the security. The bid price, on the other hand, is the highest price a prospective buyer is willing to pay for a security, and the bid-ask spread is the difference between them.read more increase in a volatile market or when the direction of the price is uncertain.

Spreads have been decreasing in the retail market due to the increasing use and popularity of exchanges and electronic systems. It enables small traders to get a competitive price, which only large players got in the past.

The blue-chip stockBlue-chip StockBlue chip stocks are issued by companies possessing large market capitalization. Blue chip companies are market leaders. They provide good returns on stocks, offer dividends, and are considered safe investments.read more companies in Dow Jones Industrial have the bid Ask spread of a few cents while the small-cap stocksSmall-cap StocksSmall cap stocks are offered by relatively small companies that are publicly listed. A small cap company has a low market capitalization ranging between $300 million to $2 billion. Small cap investors have a high-risk, high-reward approach.read more have the spread of 50 cents or over.

Bid vs. Ask Price of Stock Infographics

Let’s see the top difference between Bid vs. Ask Price.

Key Differences

  • In the case of a stock, if one believes that the price is expected to go up, the buyer would buy the stock at a price that he believes is appropriate or fair. The buyer wants to buy the stock at this price is termed as bid. In the future, when the prices go up, the buyer now converts into a seller. He will now quote a price to sell in which he believes maximum profit can be made. This price is termed the asking price.There can be a case of multiple buyers bidding a higher amount. However, the same will not be applicable in the case of the asking price.For example, bidder A is ready to pay ₹5000 for a commodity while bidder B offers ₹5700 for the same commodity. Both these bidders may be encountered with a bidder C, which may offer a price higher than this. Eventually, the bidder with the highest amount wins. It is extremely beneficial for the seller as the buyers are now pressured to go out to each other. Bidding is quite common in the case of art and unique or historical items. Such a scenario will not be possible in the case of an asking price or a seller.Bid Price is known as the sellers’ rate because if one sells the stock, he will get the bid price. If you buy the stock, you will get the Ask Price. The difference between these two prices goes to the broker or the specialist that handles the transaction.The bid priceBid PriceBid Price is the highest amount that a buyer quotes against the “ask price” (quoted by a seller) to buy particular security, stock, or any financial instrument. read more is usually quoted low and is also designed so that the exact desired outcome is achieved. Since the seller will never sell at a lower rate, the asking price will always be higher. For example, if the asking price of a particular commodity is ₹2000 and a buyer is willing to pay ₹1500 for the same, he will quote an amount of ₹1000. It may look like a compromise, and both the parties will find a midway and agree to a price where they wanted to be from the beginning.The spread will only be positive when the Ask price is greater than the bid price. A higher spread indicates the wide difference between the two prices. It makes it harder to generate a profit because the product or security will always be bought at a higher price and sold at a very low price.On the buy-sideBuy-sideThe term “buy-side” refers to entities that advise their clients like individual investors and institutional buyers on investments and securities purchases. Private equity firms, mutual fund companies, life insurance companies, unit trusts, hedge fund companies, and pension fund entities are examples of buy-side firms.read more, prices are always in decreasing order, and the topmost bid is considered the best bid price, and on the sell side prices are arranged in the increasing order, and the topmost ask price is considered the best ask price. Average of best bid and average of the best ask priceBest Ask PriceThe ask price is the lowest price of the stock at which the prospective seller of the stock is willing to sell the security he holds. In most of the exchanges, the lowest selling prices are quoted for the purpose of the trading. Along with the price, ask quote might stipulate the amount of security which is available for selling at the given stated price.read more is considered the ideal price of the stock.

Bid vs. Ask Comparative Table

Similarities

#1 Time-Specific: Both these rates are specific for a particular point in time and keep changing on a real-time basis. In the case of a stock market, the bid and Ask Rate change every second according to the current demand and supply. Therefore, these rates cannot be constant.

#2 Importance: These rates are only relevant when someone wants to buy or sell something. They help determine the demand for security and the value of the stock for a particular period.

#3 Liquidity: Help in determining the liquidity of the securityLiquidity Of The SecurityLiquidity risk refers to ‘Cash Crunch’ for a temporary or short-term period and such situations are generally detrimental to any business or profit-making organization. Consequently, the business house ends up with negative working capital in most of the cases.read more

Final Thoughts

These rates are vital for traders and, apart from stocks, are also used in forex services and derivativesDerivativesDerivatives in finance are financial instruments that derive their value from the value of the underlying asset. The underlying asset can be bonds, stocks, currency, commodities, etc. The four types of derivatives are - Option contracts, Future derivatives contracts, Swaps, Forward derivative contracts. read more trading. The difference in these spreads helps in determining the liquidity in the market. However, both rates independently do not make much sense and have to be used in coordination to understand the entire picture better.

This article has been a guide to Bid vs. Ask Price of Stock. Here we discuss the top difference between them and infographics and a comparison table. You may also have a look at the following articles –

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