Difference Between Bid and Offer
The bid rate is the maximum rate in the market which buyers of stock are willing to pay in order to purchase any stock or the other security demanded by them, whereas, the offer rate is the minimum rate in the market at which sellers are willing to sell any stock or the other security which they are currently holding.
The difference refers to Bid-Ask Spread and the narrower this spread the more liquid is the market for the concerned security/derivative. The Bid-Ask Spread is purely based on the demand and supply of the concerned security/derivative.
When you plan to acquire a good, there is a price which you are ready to pay for the good, such a price is referred to as Bid in normal parlance. The term “Bid” is popularly used in the stock market quote and refers to the price that the buyer of the stock/derivative is willing to pay for the same. Thus it is the maximum price that the buyer or a group of buyers are ready to pay for a particular security/derivative buy quantity also known as Bid Quantity.
Similarly, when you intend to sell a good, there is a minimum/lowest price which you would like to receive to sell the good, such a price is referred to as Offer/Ask price in normal parlance. The term “Offer Price” also known as Ask Price refers to the price that the seller of the stock/derivative prefers to receive for the same. Thus it is the minimum/lowest price that the seller or a group of seller intends to receive for a particular security/derivative sell quantity also known as Offer Quantity.
Both prices are necessary for a trade to get executed and represent the demand and supply side respectively of the security/derivative in which they are quoted.
Example of Bid and Offer Price
The two-way price quote of TCS Limited on Nifty on 13.01.2019 at 10.40 am is shown below.
As we can see the Stock of TCS is a highly liquid large Cap Stock and forms part of Nifty Index and as such the spread is quite narrow which would not have been the case in thinly traded securities or illiquid counters. Thus, if an investor intends to buy 1000 shares at the immediate market rate, he/she can do so by buying the shares at the current Offer Rate of Rs 2071.9.
Similarly, an Investor who intends to sell the share immediately at market rate can do so by selling the same at the current Bid rate of Rs 2071.25.
The Bid-Offer Spread is the difference of Bid rate and Offer Rate i.e. Rs 0.65 (Rs 2071.9- Rs 2071.25). It may be noted that the best bid rate and best Offer rate only are used at any point in time to determine the Bid-Offer spread.
Bid vs Offer Price Infographics
- It is the price at which the buyer agrees to buy the concerned security or financial derivative and it represents the maximum price offered for the same. On the contrary, It is the price that the intended seller has offered to sell the concerned security or financial derivative and it represents the lowest offered price. The Bid Price as such will always be lower than the Offer Price.
- Bid represents Demand-side and Bid Price highlight the price set by the buyer. On the contrary, Offer represents the Supply-side.
- For liquid securities, the difference in Bid-Offer Price (spread) is narrow whereas in the case of illiquid and thinly traded security this spread is quite wide.
|Meaning||It refers to the maximum price that the buyer of the good is willing to pay||It refers to the lowest price that the seller of the good is willing to accept in lieu of selling the goods|
|Demand/Supply||The bid represents the demand for the good. Higher the demand for the good, the higher the bid price will.||The offer represents the supply for the good. Higher the supply for the goods, lower the price will.|
|Higher/lower||Bid Price is always lower than the Offer Price. The rationale behind the same is buyers always wanted to buy at lesser prices than the price at which Initial Offer is made.||Offer Price is always higher than the Bid Price. The rationale behind the same is seller always wants more for the goods offered for sale.|
|Seller and Buyer Price||Bid Price is the Seller’s Price which means if a seller intends to sell the goods immediately he/she will have to accept the Bid Rate||Offer Price is the Buyer’s Price which means if a buyer intends to buy the goods immediately he/she will have to accept the Offer Rate.|
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 don’t 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 the concerned security and vice versa. As a matter of fact, 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 stocks and Index constituents have a narrow variation in Bid and Offer quotes.
Both are important in the execution of a trade and investors must be well versed with these terms. These prices are not the prices at which the investor needs to actually execute a trade but they act as an important yardstick through which Investor can decide the price that he/she would like to bid/offer. Similarly by seeing the Bid-Offer spread the Investor can take a call whether it is worth risk-taking to buy/sell such security/derivative.
This has been a guide to the Bid vs Offer. Here we discuss the top differences between bid and offer price along with infographics and comparison table. You may also have a look at the following articles –