Loading the player...

What is a 'Bid'

A bid is an offer made by an investor, a trader or a dealer to buy a security, commodity or currency. It stipulates both the price the potential buyer is willing to pay and the quantity to be purchased at that price. Bid also refers to the price at which a market maker is willing to buy; unlike a retail buyer, a market maker also displays an ask price.

BREAKING DOWN 'Bid'

The bid is the price in the market to buy, and the ask is the price a seller is willing to accept; the difference between the two at a given moment is called the spread. When a purchase is completed at the bid price, both the bid and the ask may move higher for the next transaction if sellers perceive good demand.

Spread

The spread between the bid and the ask is an indicator of supply and demand for the financial instrument in question. The more interest that investors have, the tighter the spread. In stock trading, the spread varies constantly as buyers and sellers are matched electronically; the size of the spread in dollars and cents reflects the price of the stock being traded. For example, a spread of $0.25 on a price of $10 is 2.5% but only 0.25% if the stock price is $100.

In foreign exchange, the standard bid-ask spread in EUR/USD interbank quotes is between two and four pips, depending on the amount being traded and the time of the day; spreads are usually narrowest in the New York morning when the European market is also open. For example, a bid of 1.1015 is typically accompanied by an ask of between 1.1017 and 1.019. A standard USD/JPY bid-ask spread is 106.18 to 106.20. Currency pairs that are less actively traded have wider spreads.

Market Makers

Market makers, who are sometimes referred to as specialists on stock exchanges, are vital to the efficiency and liquidity of the marketplace. By quoting both bid and ask prices, they step into the stock market when electronic price matching fails, and they enable investors to buy or sell a security. Specialists must always quote a price in a stock they trade, but there is no restriction as to the width of the bid-ask spread.

In the foreign exchange market, interbank traders function as the market makers in that they provide a continuous stream of two-way prices to both direct counterparties and the electronic trading systems. Their spreads widen in times of market volatility and uncertainty, and unlike their counterparts in the stock market, they are not required to make a price in a market where liquidity has dried up.

RELATED TERMS
  1. Bid And Asked

    A two-way price quotation that indicates the best price at which ...
  2. Ask

    The price a seller is willing to accept for a security, also ...
  3. Bid-Ask Spread

    The amount by which the ask price exceeds the bid. This is essentially ...
  4. Spread Indicator

    An indicator that shows the difference between the bid and ask ...
  5. Bid Price

    The price a buyer is willing to pay for a security. This is one ...
  6. Best Bid

    The highest quoted bid for a particular trading instrument among ...
Related Articles
  1. Investing

    What Does Bid And Asked Mean?

    Bid and asked is a two-way price quotation.
  2. Investing

    How To Calculate The Bid-Ask Spread

    It's very important for every investor to learn how to calculate the bid-ask spread and factor this figure when making investment decisions.
  3. Investing

    Negotiating the Bid

    A bid is an offer investors make to buy a security.
  4. Investing

    How Bid Price Affects Liquidity

    The bid price is the amount a buyer will pay for a security.
  5. Trading

    The Basics Of The Bid-Ask Spread

    The bid-ask spread is essentially a negotiation in progress. To be successful, traders must be willing to take a stand and walk away in the bid-ask process through limit orders.
  6. Insights

    What's a Dealer Market?

    In a dealer market, market participants buy and sell through dealers who are designated as market makers.
  7. Trading

    Retail FX Spreads: Do They Even Matter?

    Learn how retail forex spreads affect your ability to trade currencies.
  8. Investing

    What is Spread?

    Spread has several slightly different meanings depending on the context. Generally, spread refers to the difference between two comparable measures.
  9. Trading

    Market Makers Vs. Electronic Communications Networks

    Learn the pros and cons of trading forex through these two types of brokers.
  10. Trading

    Trading Calendar Spreads In Grain Markets

    Futures investors flock to spreads because they hold true to fundamental market factors.
RELATED FAQS
  1. What does the variance between the bid and ask price of a stock mean?

    Find out how stocks are traded in the market, why the bid and ask prices are different and why the bid-ask spread is smallest ... Read Answer >>
  2. What types of stocks have a large difference between bid and ask prices?

    Find out which factors influence bid-ask spread width. Learn why some stocks have large spreads between bid and ask prices, ... Read Answer >>
  3. 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 Answer >>
  4. What's the difference between bid-ask spread and bid-ask bounce?

    Understand the difference between the bid-ask spread that determines the buy or sell price for a stock and a bid-ask bounce, ... Read Answer >>
  5. What do the bid and ask prices represent on a stock quote?

    Learn what the bid and ask prices mean in a stock quote. Find out what represents supply and demand in the stock market and ... Read Answer >>
  6. How do I use the bid-ask spread to evaluate whether I should buy a particular stock?

    Understand the significance of the bid-ask spread for investors in making a decision on whether or not to purchase a particular ... Read Answer >>
Hot Definitions
  1. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
  2. Liquidity Event

    An event that allows initial investors in a company to cash out some or all of their ownership shares and is considered an ...
  3. Job Market

    A market in which employers search for employees and employees search for jobs. The job market is not a physical place as ...
  4. Yuppie

    Yuppie is a slang term denoting the market segment of young urban professionals. A yuppie is often characterized by youth, ...
  5. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  6. Four Percent Rule

    A rule of thumb used to determine the amount of funds to withdraw from a retirement account each year. The four percent rule ...
Trading Center