Bid, Ask, and Last Prices Defined
These concepts will have to face every person who intends to become a good trader. You will have to meet with these terms every day, and it is from them that most of the success in trading depends. In this article, we will try to explain as simply as possible what bid, ask, spread, and what functionality they have in practice. “Bid” is the price that the buyer of a financial instrument is willing to pay. “Ask” is the price at which the seller is ready to sell. “Spread” is the difference between the bid and ask prices.
In a market economy, when trading anything, the buyer names the price at which he is ready to buy (i.e., bid) and the seller – at which he is ready to sell (i.e., ask). A vivid example of such a pure market relationship is trading in the market when the buyer calls a lower price, and the seller defends the higher.
Even though both parties need to make a deal, everyone is ready to give in only a certain amount, below or above which it simply will not be profitable for him. In this article, we will not dive into the microeconomic analysis of equilibrium and other interesting phenomena. Still, rather we will talk about the applied value and meaning of prices, which are called bidders before and during the transaction.
Bid, Ask and Market Spread
Let’s continue with an example at the bazaar (which in this context is comparable to the exchange). The buyer and seller continue to bargain: the seller calls a higher price, and the buyer calls a lower one. If the terms of the transaction are not suitable for one or both parties, then the parties diverge. But we are more interested in a different outcome.
During the bidding process, the seller can lower his price slightly, and the buyer can increase it. At the same time, each side offers more favorable conditions to the other side. These conditions are not yet in full agreement, but the prices of both parties are approaching the point of contact. In other words, the difference between prices (i.e., the spread) narrows. And only when the seller and the buyer agreed on the price to be paid and the price at which to sell, a transaction is automatically concluded.
The example described above should be familiar to everyone who once traded in the market. But at the same time, few people realize that this bazaar bargaining (which – let us not hide it – is considered by the masses as a lot of traders from the lower layers of society) is a vivid example of pure market relations, which almost all countries of the world are striving for.
What is the bid price, ask price, and spread?
During trading on the exchange, the situation is very similar to that described previously. A trader who wants to sell shares (or other securities) is likely not willing to sell shares at the current market price. Similarly, a trader who wants to buy stocks may not be willing to buy at the market price. In these situations, the buying trader sets the bid price (English bid), and the selling trader sets the asking price (English ask). That is, for the transaction on the sale of these shares to take place, traders need to bargain.
Example of the bid and ask price
Trading on the exchange takes place through negotiations and reducing the spread, i.e., differences between bid and ask prices. For instance, if the current market price of a stock is 1 USD, it is quite realistic that the ask price will be 1.02, and the bid price will be 0.97. Note that bid and ask prices are only a few cents higher and lower than the market price, respectively: bid price is lower by 3 cents, and ask price is higher by 2 cents.
If the market value of security grows, then the buyer, realizing the market situation, will also raise a bid, realizing that the seller has the right to ask for more. And if, on the contrary, the current price of the stock falls, then the seller, under pressure from the market, will lower the ask price, realizing that the buyer will not want to buy at the old, higher price.
What are the bid options and exit?
Suppose the following situation – a trader wants to leave a long position and, at the same time, enter a short position. In other words, the trader decided to sell the asset before the direct purchase and sell it at the current price. An order to sell on the market will be executed at the bid price if only a buyer is found.
Ultimately, traders have few options for placing their own orders. A bet may be made higher or lower than the current rate. If the rate exceeds the current one, then it will be able to initiate a deal, as well as narrow the difference between supply and demand.
A market order can also be attributed to the option. In other words, this is an order that a trader places to accept the current price, and he wants to do it immediately, thus initiating a deal. Such activity can be undertaken if the trader is 100% sure that this task will be realized. That is, this applies only with confidence in the price. Less often, traders perform these actions in order to leave positions quickly.
What is the ask price?
What is ask price has already been described above, but we will try to explain in more detail. Ask is the lowest price that we are currently ready to offer for a certain share. Traders are constantly taking any actions on the exchange, and therefore this value is constantly changing. You can perceive this value as an indicator of the value of the stock, although it is not such. Ask price matters only at the current moment.
Information on current offers can only be obtained at the second level. And at the same time, the trader cannot receive any guarantees that the proposal will be filled out exactly as he wants. It is necessary that the shares were bought from the seller to implement the plan.
The bid-ask spread
As a rule, the difference between ask and bid prices is very small and amounts to no more than a few cents (or cents or another currency). This difference between the bid and ask price is called the spread.
Of course, traders can avoid all this by simply making a deal at the current market price.
The last price
The last price is the value due to which most of the charts are created. The schedule is updated whenever the last price changes. Suppose you want to sell a share for $ 50, and you are offered to buy it for 75. If you are successfully trading and can sell it for $ 90, then this is the last price. The last transaction is considered the last price.
As you can see, the concepts of the bid, ask, and spread is straightforward. If you buy vegetables at the market and at least once bargain, then this was a great example in which you, as a buyer, put up your bid, and the seller offered your ask. The difference between your bid and ask prices, i.e., the spread narrowed until it disappeared altogether, and you did not reach an agreement after which a deal was made. Exchange trading is carried out almost the same way: if traders are not satisfied with the market price, they call their ask and bid and then narrow the spread until the auction ends with a deal.