Difference Between Bid and Ask Price of Stock
The bid rate refers to the highest rate at which the prospective buyer of the stock is ready to pay for purchasing the security required by him, whereas, the ask rate refers to the lowest rate of the stock at which the prospective seller of the stock is ready for selling the security he is holding.
The bid price is the highest amount of money a buyer is willing to pay for a particular product, commodity. It is termed in contrast to the selling price or the ask price which 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 orders allow investors and traders to buy at the bid price and sell at the ask price.
The below image quotes the Bid and Ask prices for a stock Reliance Industries where the total bid quantity is 698,780 and total sell quantity is 26,49,459.
What is Bid-Ask Spread?
The ask price is always higher than the bid price and the difference between them is called the spread. Different types of markets use different conventions for the spread. This reflects transaction costs and also the liquidity. Bid-Ask Spreads 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. This enables small traders to get a competitive price which only large players got in the past.
The blue-chip stock companies in Dow Jones Industrial have the bid Ask spread of a few cents while the small-cap stocks 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 case of a stock, if one believes that the price is expected to go up, then the buyer would buy the stock at a price that he believes is appropriate or fair. This price at which the buyer wants to buy the stock 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 as Ask price
- There can be a case of multiple buyers bidding a higher amount, however, the same will not be applicable in case of ask 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 a higher than this. Eventually, the bidder with the highest amount wins. This is extremely beneficial for the seller as the pressure is now on the buyers go out to each other. Bidding is quite common in the case of art and unique or historic items. Such a scenario will not be possible in case of an ask price or a seller.
- Bid Price is known as sellers’ rate because if one is selling the stock then he will get the bid price. If you are buying the stock then 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 price is usually quoted low and is also designed in a way that the exact desired outcome is achieved. Since the seller will never sell at a lower rate the ask price will always be higher. For example, if the ask 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. This 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 This also 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-side prices are always in the decreasing order and the topmost bid is considered as the best bid price and on the sell, side prices are arranged in the increasing order and the topmost ask price is considered as the best ask price. Average of best bid an average of the best ask price is considered as the ideal price of the stock
Bid vs Ask Comparative Table
| Basis | Bid Price | Ask Price | ||
| Definition | Maximum price the buyer is willing to pay for a security | Minimum price the seller is willing to receive | ||
| Range | This rate is usually always higher than the current price | This rate is usually lower than the current price | ||
| Users | Sellers use Bid rate | Buyers use Ask rate | ||
| Value | It is always lower than the Ask Price | It is always higher than the bid rate | ||
| Convention | A bid of ₹15 x 120 means that the potential buyers are bidding at ₹15 for up to 120 shares | Ask of ₹19 x 115 means that there are potential sellers willing to sell at this price | ||
| Status | These are the highest bids currently and there are others online with lower bids | These prices are the lowest currently asked and there are others in line with higher Ask prices |
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. These rates cannot be constant.
#2 Importance: These rates are only relevant when someone wants to buy or sell something. They help in determining the demand for security and the value of the stock for a particular period.
#3 Liquidity: Help in determining the liquidity of the security
Final Thoughts
Both these rates are very important for traders and apart from stocks are also used in forex services and in derivatives trading. The difference in these spreads helps in determining the liquidity in the market. Both rates independently do not make much sense and have to be used in coordination to understand the entire picture better.
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