Bid And Asked

A two-way price quotation that indicates the best price at which a security can be sold and bought at a given point in time.The bid price represents the maximum price that a buyer or buyers are willing to pay for a security. The ask price represents the minimum price that a seller or sellers are willing to receive for the security. A trade or transaction occurs when the buyer and seller agree on a price for the security.

The difference between the bid and asked prices, or the spread, is a key indicator of the liquidity of the asset - generally speaking, the smaller the spread, the better the liquidity.

Also known as bid and ask, bid-ask or bid-offer.

The average investor has to contend with the bid and asked spread as an implied cost of trading. For example, if the current price quotation for security A is $10.50 / $10.55, investor X who is looking to buy A at the current market price would pay $10.55, while investor Y who wishes to sell A at the current market price would receive $10.50.

The bid-ask spread works to the advantage of the market maker. Continuing with the above example, a market maker who is quoting a price of $10.50 / $10.55 for security A is indicating a willingness to buy A at $10.50 (the bid price) and sell it at $10.55 (the asked price). The spread represents the market maker's profit.

Bid-ask spreads can vary widely depending on the security and the market. The blue-chips that constitute the Dow Jones Industrial Average may have a bid-ask spread of a few cents, while a small-cap stock may have a bid-ask spread of 50 cents or more. On a percentage basis, the difference between the bid and asked prices of the former may be much smaller than that of the latter.

The bid-ask spread can widen dramatically during periods of illiquidity or market turmoil, since traders will not be willing to pay a price beyond a certain threshold while sellers may not be willing to accept prices below a certain level.