Bid Price and Ask Price in Share Market

When trading shares or other securities in the stock market, two fundamental terms you will come across are “bid price” and “ask price”. These represent the prices at which buyers are willing to purchase and sellers are willing to sell a security. Knowing how these prices work can help traders and investors understand market liquidity, price movements, and trading costs. In the stock market, the bid price is the highest price a buyer is willing to pay for a security, while the ask (or offer) price is the lowest price a seller is willing to accept for it. A trade happens when a buyer agrees to pay the ask price or a seller accepts the bid price.

The bid price is the highest price a buyer is currently willing to pay for a security. This figure changes constantly during market hours as buyers compete with one another. For example, if multiple buyers are interested in a stock, the bid price might increase to outmatch competing bids.

The ask price is the lowest price at which a seller is willing to sell a security. Just like the bid price, it can change rapidly depending on market demand, supply, and trading volumes. If there are many sellers for a stock, the ask price could decrease as sellers compete to attract buyers.

Bid and ask prices form the basis of a stock’s “quote”. The difference between the two is called the spread. A narrow spread usually indicates high liquidity, meaning there are many buyers and sellers actively trading the stock. A wide spread often signals lower liquidity, where buying or selling quickly might be harder without affecting the price.

Imagine you want to buy shares of XYZ Ltd.

• The highest bid price in the market is ₹250 (buyer’s offer).
  

• The lowest ask price is ₹252 (seller’s offer).
  

This means that if you want to buy immediately, you must accept the seller’s ask price of ₹252. Conversely, if you want to sell immediately, you’ll receive the buyer’s bid price of ₹250.

The bid-ask spread is calculated as:

• Bid-Ask Spread = Ask Price – Bid Price

For the above example:

₹252 – ₹250 = ₹2

This spread represents the transaction cost and is often a source of profit for market makers facilitating trades.

Bid and ask prices are influenced by supply and demand in the market. The bid represents the highest price a buyer is willing to pay, while the ask is the lowest price a seller is ready to accept. Factors such as trading volume, market conditions, investor sentiment, and the liquidity of the security play a role in shaping these prices. The difference between them, known as the spread, often reflects the activity and liquidity in the market.

Bid and ask prices directly impact how quickly trades are executed and at what cost.

• Narrow Spread: Trades happen faster and at prices closer to the market value.
  

• Wide Spread: Execution may be slower or require price adjustments to find a match.
  

Market conditions, such as volatility or trading volume, also affect how bid and ask prices behave during a trading session.

• Bid Size: Number of shares buyers are willing to purchase at the bid price.
  

• Ask Size: Number of shares sellers are willing to sell at the ask price.
  

A larger bid size compared to the ask size may indicate stronger buying interest, while the reverse might suggest higher selling pressure.

Bid and ask prices are central to every stock market transaction. Understanding these terms, along with the spread between them, can help investors and traders assess market liquidity and make informed trading decisions.

This content is for informational purposes only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.