What Is a Bid Price?
A bid price is a price at which somebody is willing to buy anything, whether it be a security, asset, commodity, service, or contract. It is informally known as a “bid” in numerous markets and jurisdictions.
Generally, a bid is lower than an offered price, or “ask” price, which is the price at which people are ready to sell. The difference between the two prices is termed a bid-ask spread.
Bids are made regularly by market makers for a security and may also be made in circumstances where a seller asks a price where they may sell. Sometimes, a buyer will offer a bid even if a seller is not actively trying to sell, in which case it is termed an uninvited bid.
Understanding Bid Prices
The bid price is the amount of money a buyer is willing to pay for a security. It is contrasted with the sell (ask or offer) 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. The spread is how market makers (MMs) gain income. Thus, the bigger the spread is, the greater the profit.
Bid prices are frequently expressly set to exact a desirable outcome from the entity making the bid. For example, if the ask price of a commodity is forty dollars, and a buyer wants to spend thirty dollars for the good, they may make a bid of twenty dollars, and appear to compromise and give up something by agreeing to meet in the middle—exactly where they intended to be in the first place.
When numerous buyers put in bids, it might grow into a bidding war, when two or more bidders submit increasingly greater bids. For example, a corporation may establish an asking price of five thousand dollars on an item. Bidder A may make an offer of three thousand dollars. Bidder B may offer three thousand and five hundred dollars. Bidder A may counter with four thousand dollars.
Eventually, a price will be determined upon when a buyer makes an offer which their rivals are hesitant to top. This is highly helpful to the seller, since it puts a second pressure on the bidders to pay a greater price than if there was a single prospective buyer.
In the context of stock trading, the bid price refers to the greatest amount of money a potential buyer is ready to spend for it. Most quotation prices as presented by quote services and on stock tickers are the highest bid price available for a certain item, stock, or commodity. The ask or offer price reported by stated quote services correlates directly to the lowest asking price for a certain stock or commodity on the market. In an options market, bid prices may also be market-makers, if the market for the options contract is illiquid or lacks enough liquidity.
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Buying And Selling At The Bid
Investors and traders that initiate a market order to purchase will normally do so at the current ask price and sell at the current bid price. Limit orders, in contrast, allow investors and traders to put a purchase order at the bid price (or a sell order at the ask), which might net them a better fill.
Those wanting to sell at the market price may be termed to "hit the bid."
Bid Size
In addition to the price that individuals are prepared to buy, the amount or volume bid for is also crucial for determining the liquidity of a market. Bid sizes are often given together with a level 1 quotation. If the quote offers a bid price of $50 and a bid size of 500, meaning you can sell up to 500 shares at $50.
Bid size may be compared with the ask size, where the ask size is the quantity of a certain securities that investors are proposing to sell at the given ask price. Investors perceive discrepancies in the bid size and ask size as showing the supply and demand relationship for that security.
Example Of Bid Price
Suppose Alex wishes to acquire shares in business ABC. The stock is trading in a range between $10 and $15. But Alex is not ready to pay more than $12 for them, so they put a limit order of $12 for ABC's shares. This is their bid price.