Definition of Bid Price & Ask Price

The offer price (ask price) is the lowest price a seller is willing to accept for a financial instrument, while the bid price is the highest price a buyer is willing to pay. The gap between these two prices is called the "bid-ask spread" and is crucial in understanding market dynamics.

Before diving into trading, it’s essential to get familiar with the basic terms and market mechanisms. One of the simplest but most important concepts in trading is the difference between the bid and ask prices.

What is the Current Price?

The current price, or market value, is the price at which an asset last traded. It constantly fluctuates due to supply and demand changes. Simply put, it's the last price at which someone bought or sold an asset. This price is the result of the ongoing interactions between brokers, investors, and traders in the market.

Bid Price vs. Ask Price

• Bid Price: The maximum price buyers are ready to pay.
• Ask Price: The minimum price sellers are willing to accept.

Typically, the bid price is slightly lower than the current market price, and the ask price is higher. The difference between these two prices is known as the bid-ask spread, which plays a key role in determining the ease and cost of buying or selling.

What’s the Bid-Ask Spread?

The bid-ask spread is simply the difference between what a buyer is willing to pay (bid) and what a seller is willing to accept (ask). It acts as a measure of market liquidity and transaction cost.

In highly liquid markets, where there are many buyers and sellers, the spread is usually small. In less liquid markets, the spread tends to widen, making it harder to execute trades near the market price.

Example of Bid and Ask Price in Action

Imagine you're looking at a trading platform, and you see 'BUY' and 'SELL' prices displayed. The difference between these two prices—let’s say 2.0—is the bid-ask spread. For instance, if the buy price is $102 and the sell price is $100, the spread is $2. The smaller the spread, the closer you can trade to the market value, making it more cost-effective for traders.