# The Bid and Ask Price Explained

Jul 14, 2024

## The Bid and Ask Price

In the financial markets, the bid price refers to the highest price that a buyer is willing to pay for a security, such as a stock, bond, or currency pair. The ask price, on the other hand, is the lowest price at which a seller is willing to sell that same security.

The difference between the bid and ask prices is known as the “bid-ask spread.” This spread represents the profit margin for the market maker, who facilitates the transaction between the buyer and the seller.

### Here’s a more detailed example to illustrate these concepts:

Let’s say you want to buy shares of Company XYZ. You check the market and see that the current bid price is \$50 and the ask price is \$50.25. This means that the highest price a buyer is willing to pay for a share of Company XYZ is \$50, and the lowest price a seller is willing to accept is \$50.25.

The bid-ask spread in this case is \$0.25 (the difference between the bid and ask prices). When you place a market order to buy shares of Company XYZ, you will likely pay the ask price of \$50.25 per share. Conversely, if you place a market order to sell your shares, you will likely receive the bid price of \$50 per share.

The bid-ask spread can vary depending on the liquidity and volatility of the security. Highly liquid and actively traded securities typically have narrower bid-ask spreads, while less liquid or volatile securities may have wider spreads.

Understanding Bid and Ask Prices in Forex
In the foreign exchange (forex) market, currency pairs are quoted with two prices – the bid price and the ask price. These prices represent the buying and selling prices of the currency pair.

Bid Price:
The bid price is the highest price a buyer is willing to pay for a currency. This is the price at which you can sell the base currency.

The ask price is the lowest price a seller is willing to accept for a currency. This is the price at which you can buy the base currency.

Example:
Let’s consider the EUR/USD currency pair.

The current quote might be:

`EUR/USD = 1.10252/1.10264`

In this example:

The bid price is 1.10252, which means the highest price a buyer is willing to pay for 1 euro is \$1.10252.
The ask price is 1.10264, which means the lowest price a seller is willing to accept for 1 euro is \$1.10264.
The difference between the bid and ask prices is called the bid-ask spread, which is the profit margin for the forex broker.

When you want to buy the base currency (EUR in this case), you will pay the ask price of 1.10264.
When you want to sell the base currency, you will receive the bid price of 1.10252.
It’s important to remember that the terms “bid” and “ask” are from the broker’s perspective, not the trader’s. The trader’s perspective is “buy” and “sell”.

In the forex market, the spread is the difference between the bid price and the ask price of a currency pair. The spread is an important concept to understand, as it represents the cost of executing a trade.

Imagine you are a used iPhone dealer, and you want to buy and sell iPhones for a profit. Here’s how the bid and ask prices would work in this scenario:

1. Bid Price: A potential customer, Kim, wants to sell her iPhone to you. You quote her a bid price, which is the price you are willing to buy the iPhone for, let’s say \$1,000.

2. Ask Price: After buying the iPhone from Kim, you want to sell it to another customer, Kanye. You quote an ask price, which is the price you are willing to sell the iPhone for, let’s say \$1,500.

3. The Spread: The difference between the bid price (\$1,000) and the ask price (\$1,500) is the spread, which in this case is \$500. This \$500 spread is the profit you make as the iPhone dealer.

Now, let’s apply this concept to the forex market:

#### Forex Bid and Ask Prices Example

Suppose the current quote for the EUR/USD currency pair is:

EUR/USD = 1.10252 / 1.10264

In this example:
– The bid price is 1.10252, which is the highest price a buyer is willing to pay for 1 euro.
– The ask price is 1.10264, which is the lowest price a seller is willing to accept for 1 euro.
– The spread is the difference between the bid and ask prices, which in this case is 1.10264 – 1.10252 = 0.00012 or 1.2 pips.

The spread is the cost of executing a trade, and it represents the profit margin for the forex broker. When you buy the EUR/USD pair, you pay the ask price of 1.10264, and when you sell, you receive the bid price of 1.10252. The difference between these two prices is the spread, which is the broker’s compensation for facilitating the transaction.