What is a Bid Price?
A bid price is a price which is offered for a commodity, service, or contract. It is colloquially known as a “bid” in many markets and jurisdictions. Generally, a bid is lower than an asking price, or “ask”, and the difference between them is called a bid-ask spread. Bids can also be made in cases where the seller is not looking to sell, in which case it is considered an unsolicited offer or unsolicited bid.
Understanding Bid Price
Bid price is the amount of money a buyer is willing to pay for a security. It is contrasted with the sell price, which is the amount a seller is willing to sell a security for. The difference between these two prices is referred to as the spread and is a source of profits for traders. Thus, the higher the spread, the more the profits.
Bid prices are often specifically designed to exact a desirable outcome from the entity making the bid. For example, if the ask price of a good is forty dollars, and a buyer wants to pay thirty dollars for the good, he or she might make a bid of twenty dollars, and appear to compromise and give up something by agreeing to meet in the middle-exactly where they wanted to be in the first place.
When multiple buyers put in bids, it can develop into a bidding war, wherein two or more buyers place incrementally higher bids. For example, a firm may set an asking price of five thousand dollars on a good. Bidder A might make a bid of three thousand dollars. Bidder B may offer three thousand and five hundred dollars. Bidder A might counter with four thousand dollars.
Eventually, a price will be settled upon when a buyer makes an offer which their rivals are unwilling to top. This is quite beneficial to the seller, as it puts a second pressure on the buyers to pay a higher price than if there was a single prospective buyer.
In the context of stock trading, the bid price refers to the highest amount of money a prospective buyer is willing to spend for it. Most quote prices as displayed by quote services and on stock tickers are the highest bid price available for a given good, stock, or commodity. The ask or offer price displayed by said quote services corresponds directly to the lowest asking price for a given stock or commodity on the market. In an options market, bid prices can also be market-makers, if the market for the options contract is illiquid or lacks enough liquidity.
- Bid price is the highest price a buyer is willing to pay for a security or asset.
- A bid price is generally arrived at through a process of negotiation between the seller and a single or multiple buyers.
Buying at the Bid
Investors and traders are required by a market order to buy at the current ask price and sell at the current bid price. Limit orders, in contrast, allow investors and traders to buy at the bid and sell at the ask, which gives them a better profit.
Example of Bid Price
Suppose Kwame wants to buy shares in company ABC. The stock is trading in a range between $10-$15. But Kwame is not willing to pay more than $12 for them. He places a limit order of $12 for ABC's shares. This is his bid price.