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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.

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