What are the Bid and Ask prices?

Bid Price and Ask Price are two fundamental terms used in financial markets for quoting prices. They represent the prices at which traders are willing to buy and sell an asset in the market.

• Bid Price:

  • Definition: The bid price is the highest price a buyer is willing to pay, i.e., the price at which they are willing to purchase an asset.

  • Function: This is the buying price in the market for a given asset. The bid price represents the highest price that demand-side participants are willing to pay. When a trader wants to sell an asset, they typically sell at the bid price.

  • Example: If the bid price for a currency pair is 1.1500, this means the buyer is willing to purchase the pair at 1.1500.

• Ask Price:

  • Definition: The ask price is the lowest price a seller is willing to accept, i.e., the price at which they are willing to sell an asset.

  • Function: This is the selling price in the market for a given asset. The ask price represents the lowest price that supply-side participants are willing to accept. When a trader wants to buy an asset, they typically buy at the ask price.

  • Example: If the ask price for a currency pair is 1.1550, this means the seller is willing to sell the pair at 1.1550.

• Spread is the difference between the bid price and the ask price. It represents a part of the transaction cost and also reflects market liquidity. The smaller the spread, the better the market liquidity is usually. Here's an example to illustrate the relationship between bid and ask prices:

  • Bid Price: 1.1500

  • Ask Price: 1.1550

  • Spread: 1.1550 - 1.1500 = 0.0050 (or 50 pips)

In this example, the spread between the bid and ask prices is 50 pips, which represents part of the transaction cost. Traders pay the ask price when buying and receive the bid price when selling, so the spread directly affects the cost of trading.