The bid and ask price is mainly the best price a trader is ready to buy/sell for. The highest price a buyer is ready to pay for a financial instrument is the bid price. Conversely, the lowest price a seller will accept for the instrument is the ask price. The bid-ask spread, therefore, is the difference between the bid price and the ask price.
Prior to trading in any market, it is useful to get used to the terminology in vogue. Being able to make good sense of basic trading terms is a prerequisite for any trader. The difference between the bid price and the ask price is a very basic and crucial theory.
The current price : pivotal to the bid-ask price
To make sense of the difference between the bid price and the ask price of a financial instrument, you gave to first understand the current price as applicable in trading.
The current price, or market value, is in flux always. It is decoded by the price at which the given asset traded last. Per basic economic theory, the current price is determined where supply and demand meet. Fluctuations in either supply or demand lead to the current price ascending or descending.
The current price as obtainable on a market exchange is generally determined by the most recent amount that was paid for an asset by a trader. It is the result of brokers, investors, and traders interacting with each other in a market setting.
Spread : defining the bid ask price
When trading online, regardless if its spread betting or CFD trading, spread stands for the difference between an asset’s buy and sell price. The price at which you buy – bid price – is always often relative to the price at which you sell – ask price. The underlying market price will typically be in the middle.
Implemented by market makers, brokers and other providers trading spreads add cost to a trading opportunity. On the basis of how volatile, expensive, and liquid an asset is, the spread fluctuates.
A spread in trading involves an asset’s purchase and the sale of another occurring at the same time, there being an option or trading contract. Here, the spread is the difference between the bid and the ask price.
A trading spread is the difference between the bid and ask price for an asset. The latter could be a currency pair, commodity or index. This is also the bid-ask spread. A PrimeFin, InvestBy or ABinvesting trading platform calculates the spread so you don’t have to. However, it is good to know where spread costs come from.
An instrument’s spread stands for the close supply and demand alignment. An asset price consensus takes shape in case the bid-ask spread is very low. Nonetheless, if three are differences between sellers and buyers over an asset’s worth, the spread is typically wider.
Calculating the spread :How does bid and ask work for stocks?
For instance, let’s say an asset has
- A buy/bid price of 1449.5
- A sell/ask price of 1451.1
The spread is the difference between buy and sell price. Or, 1.6 points.
The spread is a vital piece of information to take cognisance of when analysing trading costs. The spread of an instrument is variable, directly impacting the trade’s value.
Spreads are set up around an asset’s current price/market price. Brokers and market makers may add transactional costs in the spread, simplifying the transaction process. This is particularly rife in future and forward contracts.
Several factors affect the spread in trading, like so:
Liquidity is decided upon by the trade volumes. A liquid asset may readily be the trend to cash. An illiquid asset finds it hard to do likewise. While less commonly trade assets have a wider spread, popularly traded assets are characterised by a tighter spread.
The spread is typically wider when the markets are fluctuating with large and rapid price movements. Market makers may use volatility as a chance to increase the spreads, traders trying to profit from fluctuations
Price is linked to both liquidity and volatility . When an asset price is low, volatility is higher and liquidity is lower. This gives a wider spread. When an asset is more expensive, the opposite eventuates.
Spread strategy : bid-ask price
When you have placed your trade, either selecting buy/sell on a given product, you will expect the market to move further than the spread’s price. In the event of this result being attained when you close your trade, there may be profit by either buying your sell trade or selling your buy trade. Similarly, while the price stays between/outside the spread range, a losing trade would be the most likely result.
Spread in trading: instances
Suppose we are calculating the FTSE 100 stock index spread , while downloading as inputs:
The sell price is 6446.7
Buy price 6447.7
Subtracting the selling price from the buy price we get the spread. Here the spread is 1.0.
Take another instance. Suppose we are calculating the GBP/USD spread with the following information :
- Sell price is 1.65364
- Buy price is 1.6373
Subtracting the buy price from the sell price
1.65373 – 1.65364 = 0.00009.
The spread is based on the last large number in the price quote. Hence, the spread is 0.9.
Differentiating bid and ask/bid-ask price demarcation
Since the current price stands for instrument’s market value, the bid and ask prices stand for the maximum buying and minimum selling price respectively.
The bid price, or the bid, is the maximum price a buyer is ready to pay for an instrument; the ask price, usually called the ask, is the minimum price a seller is willing to accept for the instrument.
The bid price is typically higher than the instrument’s current price. On the other hand, the ask price is typically lower than the current price. The difference between the bid price and ask price is the bid and ask spread, bid-ask spread, or bid-offer spread.
The bid-ask spread is the difference between an instrument’s bid and ask spread. For instance, the difference in price between someone purchasing a stock and someone selling a stock stands for the bid-ask spread.
Bid and ask prices are displayed in real-time and are updating all the time. The fluctuating difference between the two is a vital indicator of the market’s liquidity and the transaction cost’s size.
Financial market high liquidity is frequently due to a large number of orders t buy/sell in that market. The liquidity permits you to buy/sell closer to the market value price. Hence, the bid-ask spread tightens proportionately to market liquidity. Conversely, when the market is less liquid the spread enhances since it is harder to sell and buy close to the market value, given the lack of trade volumes.
Bid & ask price: instance
In the context of the InvestBy trading platform, bid and ask prices are pointed out by ‘buy’ and ‘sell’ tickets in any price quote window. We arrive at our result in the manner described above:
Buy price (207.73) – Sell Price ( 207.40) = 0.33.
The spread is based on the last large number in the price quote.
The bid and ask refer to price quotes. Together, the bid vs ask prices point out a two-way price quote that shows the best price at which securities may be bought and sold at a specific time. The bid price is the highest amount a buyer is ready to pay for a security. This could be a share/stock. The ask price is the minimum amount the seller is ready to accept for that security.
When is the bid-ask price good for trading?
The difference between the bid and ask price is the spread. Bid-ask spreads may be as small as a few cents or larger than 50 cents or $1 contingent on the security that’s being traded. The market sets bid and ask prices thru the placement of buy and sell orders.
In case buying demand is more than selling supply, then frequently the stock price will appreciate in the short term, although that is not assured.
Supply and demand played a pivotal role in spread determination. When the bid price and ask price are quite near each other, the implication is that there’s enough liquidity in the security. It is called a narrow bid- ask spread. A lot of stock liquidity implies it is relatively easier to buy/sell the security at a competitive price, particularly if the order size is large.
Conversely, when the bid-ask spread is wide, it may be cumbersome to trade the security.
When investors discuss the bid ask spread, they are frequently referring to the stocks. Nonetheless, the same terms are employed when other securities such as options and bonds. In options, the bid vs ask price differs depending on where the option stands.
Trading profits impacted by bid-ask spread :Why is the bid much lower than ask? Or Why are bid and ask prices so different? Or Why is ask higher than bid?
There are diverse order types that may be placed notwithstanding the most basic being the market order. Filled at the best obtainable price, an investor could place one to buy 1000 shares of stock. If the ask price is $110, that’s the trade execution price.
The bid -ask price impacts the trading profits at $101 ask price. In the event of an investor placing a market order on this stock, the stock will be bought at $101. Subsequently, suppose the stock appreciates 3% where the bid price shifts to $103 and the ask price shifts to $104. The investor will get $103 in case they decide to sell shares thru a market order. Despite the stock price appreciating by R$3, the profit per share for the investor is $2. The $1 profit leakage is shown as the $1bid ask spread on the stock.
In case an investor plans to buy a security’s 1500 shares, and there being at that time 1000 shares available for the ongoing R$110 ask price, a market order could well purchase 1000 shares at $101, and 500 shares at the best available price higher than $101.
An investor might for placing a limit order. A buy limit order is executed only if the security price declines to that level. A sell limit order is executed provided the security price appreciates to that level.
For example, you get a completed limit order only if the price is at above / below the bid price. If investors are looking to achieve a particular profitable level, they may place a sell limit order.
Stock/fund execution order types: how far does bid-ask price?
Traders seeking to make use of bid ask spread may gan that end by utilising the following:
- Market order
This is a trade order to buy/sell a stock/fund immediately. An expert will assure the order is executed, there will be no guarantee as regards the trade execution price. In terms of the bid and the ask, a market order will be executed near or close to the standing bid and ask level when buying/selling a stock. The last traded price is not always the trade execution price;
- Limit order
The order permits for the buying/selling of a stock at a particular price, or better. Limit orders come with variety. For instance, a buy limit order is only executed at the limit price.
Suppose you place a limit order to purchase shares at no higher than R$20 per share. Were the share price $20 or lower, only then would there be order execution;
- Stop order
This permits you to buy/sell a stock /fund post the security hitting a particular price level. The stop price is the level. With stop order there’s an executed as a limit order;
- Buy stop order
This is an executive order where the price is higher than the ongoing market;
- Sell stop order
This order type limits the loss on security. Execution stop price has to be lower than the security’s ongoing market price .
The bid price spread may impact the price at which buying/selling is done – and the investor’s overall general portfolio return. Focus on trade execution is key for clients of PrimeFin, InvesrBy, and ABinvesting. Frequently, brokers sell execution order flow to particular market makers to enhance their revenue instead of going to the market makers with the best price.
Our recommended brokers try to match your order with other clients within the network. The latter offers pricing midway between bid and offer. For peace of mind, knowing the security of how/where your order flow is handled.