What Is a Bid Price?
Let me explain what a bid price really means. It's the price someone is willing to pay to buy something, like a security, asset, commodity, service, or even a contract. You might hear it called just a 'bid' in various markets around the world.
Usually, this bid is lower than the offered price, which we call the 'ask' price—that's what sellers are willing to accept. The gap between them is the bid-ask spread.
How Bids Work in Practice
Market makers keep making bids for securities all the time, and sometimes bids come in when a seller asks for offers. If a buyer throws in a bid without the seller even looking to sell, that's an unsolicited bid.
Key Takeaways
- The bid price is the highest price a buyer is willing to pay for a security or asset.
- A bid price is generally arrived at through a process of negotiation between the seller and a single buyer or multiple buyers.
- The difference between the bid price and ask price is known as the market's spread, and is a measure of liquidity in that security.
Understanding Bid Prices
The bid price is simply the money a buyer will put up for a security. Compare that to the sell price, or ask, which is what the seller wants. That difference is the spread, and it's how market makers make their money—the bigger the spread, the bigger their profit.
Bids are often crafted to get a specific result. Say the ask is $40 for something, and you want to pay $30. You might bid $20, then 'compromise' to meet in the middle, right where you aimed all along.
When several buyers get involved, it turns into a bidding war. A seller might ask $5,000 for an item. One bidder offers $3,000, another $3,500, then the first counters with $4,000. It keeps going until no one tops the last bid. This pressures buyers to pay more, which is great for the seller compared to dealing with just one buyer.
The Role of NBBO
Quotes often show the national best bid and offer (NBBO) from all exchanges where a security is listed. So, the best bid might come from one place, and the best offer from another.
In stock trading, the bid price is the top amount a buyer will spend. Quote services and tickers usually show the highest bid for a stock or commodity, with the ask being the lowest sell price. In options markets, if liquidity is low, market makers might set those bid prices.
Buying and Selling at the Bid
If you're an investor or trader placing a market order to buy, you'll pay the current ask price; to sell, you'll get the current bid. But with limit orders, you can buy at the bid or sell at the ask, potentially getting a better deal.
Selling right at the market price? That's called 'hitting the bid.'
Bid Size
Beyond the price, the volume or bid size matters for market liquidity. You'll see it with level 1 quotes. If the bid is $50 with a size of 500, you can sell up to 500 shares at that price.
Compare that to ask size, which is the volume offered for sale at the ask price. Differences in bid and ask sizes show the supply and demand for that security.
Example of Bid Price
Take Alex, who wants shares in company ABC trading between $10 and $15. Alex won't pay over $12, so they set a limit order at $12. That's their bid price.
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