What is Bid Price, and How does it Compare to an Ask Price?

DailyForex.com Team

The bid price and ask price are the two components of a two-way price quotation system, the norm in financial markets. The bid price represents the price a market participant offers to buy an asset, while the ask price is the selling price. Market makers continuously offer bid prices for trading instruments, which are generally lower than ask prices. The difference between bid vs. ask price is the spread and the profit a broker earns per transaction in a commission-free pricing environment.

Bid Price Meaning explained with Examples

A trader looking to buy any asset must look at the bid price provided by a broker. Brokers source bid and ask prices from numerous liquidity providers and list the best available in their trading platform plus their internal mark-up, unless they charge trading commissions, where traders get raw market spreads. Spreads are essential for traders, as they present the most significant trading costs and can define which strategy to use at a broker. Generally, commission-based brokers offer a lower pricing environment, as the quoted bid price represents the actual market spread. Commission-free brokers apply an internal mark-up, and we will show the difference with an example below.

Here is a bid/ask price example:  

  • Assume the EUR/USD trades with a bit price of 1.0720, with an ask price of 1.0720
  • The raw spread in the interbank market, the difference between bid vs. ask price, is 0
  • A commission-based broker may charge a fee of $4.00 per 1.0 standard lot for access to this spread
  • A commission-free broker may add an internal mark-up of six pips to the ask price, increasing it from 1.0720 to 1.0726, for a cost of $6.00 per 1.0 standard lot
  • The bid price equals the highest price a buyer offers to pay for an asset
  • The ask price represents the lowest price a seller accepts for an asset
  • If demand is higher than supply, the bid price increases and the ask price moves in tandem
  • If demand is lower than supply, the bid price decreases, taking the ask price with it
  • High liquidity results in a narrow spread in the bid price vs. ask price, while low liquidity widens the difference, making trading more expensive

What is the Bid Price Formula, and how does it Work?

Brokers source the price for each asset from numerous liquidity providers and market makers. Therefore, the actual buying and selling of trading instruments plus the trading volume determine the bid price formula.  One important aspect to remember is that a market maker often places a bid price well below the price they seek, allowing for an upward adjustment to where they would like to buy the asset. While it appears that the bidder compromised and negotiated, the market big generally reflects the bid price a buyer wanted.

Buying and Selling at the Bid Price

A market participant placing a market order does so at the current bid price while selling at the bid price occurs at the associated ask price. Brokers display both quotes with the asset, allowing investors and traders to see the spread, offering vital liquidity information. Those with access to Level II data can see the order book, including volume information. It is impossible to sell at the bid or buy at the ask, but limit or pending orders allow traders and investors to specify their desired price. Should the market reach the price, the broker will execute the order.

The Importance of the Bid Size

The bid size, or the number of units available for purchase at the bid price, is equally important to market participants as the bid price and the spread. 

Here is an example:

  • An asset has a bid price of 75 with a bid size of 1,500, which means a market participant may purchase 1,500 units at 75
  • Should an order consist of 4,000 units at 75, the outcome depends on the broker and available order options after the purchase of 1,500 units
  • Either the broker fills the entire order at the best price, in this case above 75, or the broker completes a partial fill and waits for the next bid at 75 to complete the order

The bid size and the ask size often differ, depending on supply and demand and the overall order flow of an asset. For example, the bid size could be 1,500 at 75, while the ask side reads 5,000 at 77.

How does the Bid vs. Ask Price Differ?

The bid price refers to the highest price an asset is available to buy, and the ask price is the lowest available price to sell. The difference is the spread, which the broker earns for facilitating the transaction. The Forex market, due to its liquidity, can show a 0-pip spread, meaning the bid price vs. offer price is identical. Only commission-based brokers offer raw spreads to clients, as they charge a commission, allowing for conflict-of-interested-free trading. Market makers earn money from client losses, where they present the direct counterparty to the transaction.

Bid Price Conclusion

The bid price is the highest price an asset is available to buy, but market participants must also consider the bid size, as it dictates the volume available for purchase. The bid price is always below the ask price, and the difference is the spreads, which is the profit a broker earns per transaction.

FAQs

Do you buy at bid or ask?

You always buy at the bid price and sell at the ask price.

Why bid is higher than ask?

The difference between the bid and ask price is the spread, representing the profit a broker earns.

Why are the bid and ask prices so different?

The difference between the bid price vs. the ask price depends on liquidity, where higher liquidity results in a narrow spread, which widens as liquidity fades.

DailyForex.com Team
The DailyForex.com team is comprised of analysts and researchers from around the world who watch the market throughout the day to provide you with unique perspectives and helpful analysis that can help improve your Forex trading.

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