Bid And Asked

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DEFINITION of '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.

BREAKING DOWN 'Bid And Asked'

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.

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RELATED FAQS
  1. What do the bid and ask prices represent on a stock quote?

    The bid and ask prices are stock market terms representing the supply and demand for a stock. The bid price represents the ... Read Full Answer >>
  2. What are the advantages of a limit order over a market order?

    The primary advantage of a limit order over a market order is that the limit order guarantees market entry at the trader's ... Read Full Answer >>
  3. How do I use software to make arbitrage trades?

    Traders use software programs to detect arbitrage trading opportunities they can take advantage of for potential profits. ... Read Full Answer >>
  4. What is the difference between a broker and a market maker?

    A broker is an intermediary who has a license to buy and sell securities on a client's behalf. Stockbrokers coordinate contracts ... Read Full Answer >>
  5. What are the determinants of a stock's bid-ask spread?

    Stock exchanges are set up to assist brokers and other specialists in coordinating bid and ask prices. The bid price is the ... Read Full Answer >>
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    All publicly-traded companies have a set number of shares that are outstanding on the stock market. A stock split is a decision ... Read Full Answer >>

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