Difference Between Bid and Offer

The difference refers to the bid-ask spread, and the narrower this spread, the more liquid the market for the concerned security/derivative. The bid-ask spread Bid-ask spreadThe 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 depends on the demand and supply of the concerned security/derivative.

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When you plan to acquire a good, there is a price that you are ready to pay for the good. Such a price is said to as a bid in normal parlance. The term “bid” is popularly used in the stock market quote and refers to the price the buyer of the stock/derivative is willing to pay for the same. Thus, the maximum price the buyer or a group of buyers are ready to pay for a particular security/derivative buys quantity, also known as bid quantity.

Similarly, when you intend to sell a good, you would like to receive a minimum/lowest price from selling the good; such a price is referred to as offer/ask priceAsk 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 in normal parlance. The term “offer price,” also known as the ask price, refers to the price that the seller of the stock/derivative prefers to receive for the same. Thus, the minimum/lowest price the seller or a group of sellers intends to receive for a particular security/derivative sell quantity is also known as the offer quantity.

Both prices are necessary for a trade to execute and represent the demand and supply sides of the security/derivative they quote.

Example of Bid and Offer Price

The two-way price quote of TCS Ltd. on Nifty on 13.01.2019 at 10.40 a.m. is below.

As we can see, the stock of TCS is a highly liquid large-cap stock and forms part of the Nifty index, and as such, the spread is quite narrow, which would not have been the case in thinly traded securities illiquid counters. Thus, if an investor intends to buy 1,000 shares at the immediate market rate, they can buy them at the current offer rate of ₹2071.9.

Similarly, an investor who wants to sell the share immediately at the market rate can sell the same at the current bid rate of ₹2071.25.

The bid-offer spread is the difference between bid and offer rates, i.e., ₹0.65 (₹2071.9-₹2071.25). One may note that the best bid rate and best offer rate are only used at any time to determine the bid-offer spread.

Bid vs. Offer Price Infographics

Key Differences

  • It is the price at which the buyer agrees to buy the concerned security or financial derivative. It represents the maximum price offered for the same. On the contrary, the intended seller’s price to sell the concerned security or financial derivative represents the lowest suggested price. The bid price will always be lower than the offer price.The bid represents the demand side, and the bid price highlights the price set by the buyer. On the contrary, the offer represents the supply side.The difference in bid-offer price (spread) is narrow for liquid securities. This spread is quite wide in the case of illiquid and thinly traded security.

Comparative Table

Conclusion

It determines the demand and supply side of a security/derivative and the price at which both matches result in a trade. The bid and offer rates keep changing during market trading hours and do not remain constant. Although the terms find their usage more in financial markets, the rationale behind the two finds its relevance in any exchange of goods.

The narrower the bid-offer spread, the more liquid the market is for security and vice versa. As a result, normally, small-cap stocks or thinly traded counters have a wide variation in their bid and offer quotes, whereas more liquid counters such as large-cap stocksLarge Cap StocksLarge-cap stocks refer to stocks of large companies with value, also known as the market capitalization of 10 billion dollars or more, and these stocks are less risky than others and are stable. They also pay a good dividend and return, and it is the safest option to invest.read more and index constituents have a little variation in bid-offer quotes.

Both are important in executing a trade, and investors must be well versed with these terms. These are not the prices the investor needs to conduct a business, but they act as an important yardstick through which the investor can decide the price they would like to bid/offer. Similarly, by seeing the bid-offer spread, investors can determine whether it is worth risk-taking to buy/sell such security/derivative.

This article is a guide to Bid vs Offer. Here, we discuss the difference between bid and offer prices, infographics, and a comparison table. You may also look at the following articles: –

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