When trading stocks, bonds, currencies or other securities, the prices that the buyer and seller deal with are slightly different. A bid price — usually referred to simply as the bid — is the highest price that a buyer (i.e., bidder) is willing to pay for the security. Ask price — also called offer price, asking price, or simply offer or ask — is the lowest price a seller will accept for the security.
These prices are rarely the same: the ask price is usually higher than the bid price. If you are buying a stock, you pay the ask price. If you sell a stock, you receive the bid price. The difference between the two prices is called the spread.
The Spread (or Bid-Ask spread)
The “bid-ask spread” is the difference between the bid and ask prices for a security. The percent spread can be calculated as follows:
The spread is retained as profit by the broker who handles the transaction and pays for related fees.
Bid-ask spread is affected by a stock’s liquidity i.e., the number of stocks that are traded on a daily basis. Those with larger trading volumes tend to have many buyers and sellers in the marketplace, and therefore will have smaller bid-ask spreads than those that are traded less often.
The spread is also called the bid-offer spread, bid/ask or buy-sell spread.
Implications of the bid-ask spread
The size of the bid-offer spread is a measure of the liquidity of the market for that security, and also indicative of transaction costs. If the spread is zero then it is said to be a frictionless asset.
Transaction costs consist of two main elements:
- Brokerage fees
- Bid-offer spread
Under competitive conditions, brokerage fees tend to be small and don't vary. In such cases, the bid-offer spread measures the cost of making transactions without delay. Liquidity cost is the difference in price paid by an urgent buyer and received by an urgent seller.
One example of the difference between bid and ask price is with currency exchange. For example, on September 17, 2013 the EUR/USD bid and offer prices were as follows:
- Bid price: 1.3350 USD per EUR
- Ask price: 1.3354 USD per EUR
So someone looking to buy euros would have to pay $1.3354 per euro while someone looking to sell euros would only receive $1.3350. The spread is $0.0004 and the spread percentage is roughly 0.03%.
Some more examples of ask and bid prices as of September 2013 are included in the table below: