Bid and Ask

Currency Swap Definition

What is supply and demand?

The term bid and ask (also known as offer and offer) refers to a bidirectional quote which indicates the best potential price at which a security can be sold and bought at a given time. The price offered represents the maximum price that a buyer is willing to pay for a share of stock or other security. The asking price represents the minimum price that a seller is ready to take for this same title. An exchange or transaction takes place after the buyer and the seller have agreed on a price for the security which is neither higher than supply nor lower than demand.

The difference between the bid and ask prices, or the spread, is a key indicator of asset liquidity. In general, the smaller the spread, the better the liquidity.

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Bid and ask

Understanding supply and demand

The average investor challenges the offer and demands the spread as an implied trading cost. For example, if the current price of 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.

Key points to remember

  • The offer price refers to the higher price that a buyer will pay for a guarantee.
  • The asking price refers to the lowest price that a seller will accept for a guarantee.
  • The difference between these two prices is known as the spread; the smaller the difference, the greater the liquidity of the given security.

Who benefits from the bid-ask spread?

The bid-ask spread works to the advantage of the market maker. To continue with the above example, a market maker quoting a price of $ 10.50 / $ 10.55 for title A indicates his willingness to buy A at $ 10.50 (the price of the offer) and sell it at $ 10.55 (the asking price). The difference represents the profit of the market maker.

Bid-ask spreads can vary widely, depending on security and the market. The blue chip companies that make up the Dow Jones Industrial Average can have a bid-ask spread of just a few cents, while a small-cap stock can have a buy-sell spread of 50 cents or more.

The bid-ask spread can widen considerably during periods of illiquidity or market turbulence, as traders will not be willing to pay a price above a certain threshold and sellers may not be willing to accept prices below a certain level.

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