General definition of the terms Bid and Ask in the stock market :
In the world of stock market investment, the terms bid and ask are notions that traders and broker intermediaries use to designate the best bid and the best offer for an asset. The bid here represents the offer to buy and the ask the offer to sell.
To be more precise, these terms correspond to the prices at which a counterparty is possible in order to complete a transaction. It should be remembered that the sale of an asset necessarily requires a buyer willing to purchase it. Conversely, the purchase of an asset necessarily requires a seller to the contrary.
Thus, when you speculate on the stock market, the market order on the asset of your choice will be placed at the ask price if you buy this asset and at the bid price if you sell it. But why are bid and ask prices different? This is what we will explain to you below by detailing what the spread is, i.e. the difference between the bid and the ask in the stock market.
The most important thing to remember here about bid and ask is that these two prices will be quoted when you place orders on the stock market but also if you use derivatives such as CFDs on the stock market.
How are bid and ask displayed on your order book or trading platforms?
It is also important to know how the bid and ask are displayed when investing online, whether it is on your order book or on a CFD platform.
When you place your orders on the stock exchange through an order book, these orders placed on the market are systematically registered in the order book, whether it is a buy or a sell order. Here, sell orders on the asset concerned represent the bid and the best offer is called the best bid and is entered at the very top of this book. The best bid here represents the price at which you can buy the asset. As far as buy orders on the asset are concerned, they are represented by the ask. Here the best bid is called the best ask and is also listed at the top of the order book. This is the price at which it is possible to buy the asset.
The display of the ask and bid prices on a trading platform is essentially the same. Here, when you want to place a buy or sell order on a security, these two prices are systematically indicated on each side of the real stock market price of this one. Most often, and for better readability, the ask is written in red and the bid in green.
What are the elements that drive the price of the ask and bid?
Like the price of the asset to which they relate, the ask and bid move in real time according to the supply and demand for that asset.
Thus, when demand is strong, the sellers of the asset wish to sell their values at a higher price. They then decide to increase their selling price, which also increases the bid. In this case, the buyers are obliged to match this increase in the selling price by increasing their purchase price, which also increases the ask.
In the opposite conditions and when demand is low, buyers will do everything to buy the asset cheaper. Buyers will therefore lower their offer price, which will also lower the ask price. Sellers being forced to align themselves will lower their selling price which will also lower the bid.
But be careful! The gap between the bid and the ask is not always the same. Indeed, this gap will also change over time. We often observe that a high volatility of an asset will produce a low gap between these two values. Let's also remember that the level of volatility of an asset will also have an important impact on the evolution of the bid and ask prices. This means that the more volatile an asset is, the faster the bid and ask will move.
The spread or the difference between the bid and the ask:
Another concept that we quickly mentioned above and that is directly related to the notions of bid and ask is the spread. But what is a spread in the stock market? This notion of spread is important in many ways and you should indeed know what it represents, especially in terms of the cost of your transactions.
The spread is the difference between the bid price and the ask price. More simply, it is a representation of the price difference between the purchase price and the sale price of a stock or a security.
It is also important to note here that the spread represents one of the elements of remuneration of stockbrokers apart from commissions and other fees such as swap fees. These spreads are most often cashed when the investor opens a position. Indeed, by buying an asset at a price slightly higher than its real market price, the difference generated is directly collected by the broker. Of course, the spread charged by the broker is known in advance and clearly displayed for each asset. On online trading platforms such as CFD platforms, this spread is expressed in pips or points.
It is therefore important to understand the difference between bid and ask before taking a position in the market.