You’ve started trading. You know trading means buying and selling assets. While opening a position, you see the bid and ask price. Your broker is charging a spread on your trade. Suddenly, you start panicking because you're not fully familiar with these terms.
This is common among new traders or those who don’t clearly understand how these things work. The bid price is what you can sell an asset for, and the ask price is what you pay to buy it. The difference between them is called the spread.
But just knowing these basics isn’t enough if you want your trade to execute the way you expect.
So today, we’ll dive deep into what bid price, ask price, and spread actually mean. By the end, you’ll have a much clearer idea of the bid, ask price and spread.
What Are Bid and Ask Prices?
The bid and ask prices represent the two sides of a trade. They show the price range within which a trade can happen. The bid is the price buyers are offering to pay. And the ask is the price sellers want in return.
Let's understand in-depth.
What Does "Bid Price" Mean in Trading?
The Bid Price is the highest price a buyer is currently willing to pay for a financial asset (a currency pair, stock, or commodity). This is the price at which you can sell an asset instantly in the market.
When opening a long (buy) position, the trader buys at the bid price. Traders expect the asset’s value to rise. To make a profit, the price needs to move above the bid. So that when they close the position, the asking price is higher than what they originally paid.
It also shows real-time market demand. The more buyers, the stronger the bid. The bid price constantly changes based on market conditions, trader sentiment, economic news, and order flow.
Point to note that placing a bid order doesn’t guarantee execution at the desired price. It depends on market liquidity. For the trade to happen, there must be a seller willing to accept that price (ask). If no match occurs, the bid remains in the order book until filled, canceled, or updated.
Characteristics:
- Represents Buyer Demand
- Used in Sell Orders
- Part of the Bid-Ask Spread
- Fluctuates with Market Activity
- No Execution Guarantee
- Lower than Ask Price
- Visible on Trading Platforms
- Impacts on Entry and Exit Strategy
What Does "Ask Price" Mean in Trading?
The Ask Price is the lowest price a seller is currently willing to accept for a financial asset (like a currency pair, stock, or commodity). This is the price at which you can buy an asset instantly in the market.
When opening a long (buy) position, a trader purchases the asset at the ask price. They want the asset’s value to increase. To earn a profit, the market must move above the ask. Then, when the trader closes the position, the bid price is higher than the original purchase price.
The asking price reflects the current supply in the market. The more sellers there are, the lower the ask tends to be. It changes constantly based on market activity, trader sentiment, economic events, and liquidity levels.
However, placing a buy order at the ask price doesn’t always mean instant execution. There must be enough volume available from sellers at that price. If there isn’t, the order might be partially filled or remain open until matched.
Characteristics:
- Represents Seller Supply
- Used in Buy Orders
- Part of the Bid-Ask Spread
- Fluctuates with Market Activity
- No Execution Guarantee
- Higher than Bid Price
- Visible on Trading Platforms
- Impacts on Entry and Exit Strategy
Marketplace example
Imagine you’re on a trading platform looking at a stock or currency pair.
The bid price is $100.
→ This is the highest price buyers are currently willing to pay.
The ask price is $101.
→ This is the lowest price sellers are willing to accept.
You, as a trader, want to buy the asset. To do that instantly, you must pay the ask price ($101), because that’s what the seller is asking. If you want to sell the asset, you will receive the bid price ($100), which is what buyers are offering.
So, in trading terms:
How Are the Bid and Ask Prices Determined?
Bid and ask prices are not set by any single person, broker, or institution. They are controlled entirely by the open market. These prices are influenced by real-time supply and demand. When more traders are eager to buy an asset than sell it, both bid and ask prices tend to rise. This signals a strong demand. On the flip side, if more participants want to sell, prices begin to fall due to increased supply.
Market depth, order book activity, and even trader psychology also play a role in determining the bid and ask price. For example, during major news events or earnings reports, prices can shift quickly as traders rush to adjust their positions.
Big players like market makers, liquidity providers, and high-frequency trading bots also influence price movements. They continuously place buy and sell orders at different levels. This helps maintain a stable market. In the market, when these players adjust their quotes instantly, this causes bid and ask prices to change with volatility.
Comparison Table Between Bid vs Ask Price
Here is a quick comparison between the bid and ask prices.
Understanding the Spread
The spread is the difference between the bid price and the ask price, which is a key measure of market liquidity. This small gap is more than just numbers. It represents both the transaction cost for traders.
How the Spread Works
When a retail trader places a trade, they’re either buying at the ask price or selling at the bid price. The spread is the cost of entering the market. This cost isn’t charged separately. Rather, it’s already included in the price you see when you buy or sell.
The parties who benefit from this gap are market makers, brokers, or banks. The market makers provide continuous buy and sell quotes. They take the spread as compensation for providing liquidity and ensuring smoother market flow.
Factors influencing spread are,
- Market Liquidity
- Volatility
- Time of Day
- Broker Type
The size of the spread depends heavily on how liquid the asset is. The more frequently an asset is traded, the tighter the spread. For example:
Major Forex pairs like EUR/USD have very small spreads, often just 1–2 pips.
Exotic currency pairs or thinly traded stocks often have wider spreads. This can raise trading costs.
Market conditions also play a role. During high volatility, which can be major news releases, spreads can widen sharply, even in liquid markets. On the other hand, during active sessions with high volume (like the London–New York overlap in Forex), spreads often stay tight.
Why the Spread Matters
A narrow spread means lower trading costs and easier execution. This is ideal for scalpers, day traders, and high-volume strategies.
A wide spread can signal low liquidity or high uncertainty. This makes it harder to enter and exit positions, especially if you have large orders.
In rare cases, a zero spread may appear. This happens when the bid and ask are the same for a very short moment in ultra-liquid markets. Though it may seem appealing to traders, such frictionless trading is not common.
Spread Example with Calculation
Let’s say you're looking at a currency pair:
Bid Price (Sell): 1.1010
Ask Price (Buy): 1.1013
Now, let’s calculate the spread:
Spread = Ask Price – Bid Price
Spread = 1.1013 – 1.1010 = 0.0003
In Forex, prices are quoted in pips (usually the 4th decimal place), so Spread = 3 pips
Spread Types
There are mainly two types of spread: fixed and variable.
1. Fixed Spread: A fixed spread stays the same regardless of market conditions. It does not widen or shrink with volatility or news events. This is offered mainly by market maker brokers. Here, you always know the cost upfront, even during high-volatility events.
Example: A broker may offer a constant 2-pip spread on EUR/USD.
Pros:
- Predictable costs.
- Great for beginners or during news releases.
- Easier to plan strategies (no surprise jumps in spread).
Cons:
- Slightly wider than the lowest variable spreads.
- Requotes may happen during big market moves (your trade might not go through instantly).
2. Variable (Floating) Spread: A variable or floating spread changes in real-time based on market conditions like volatility, news, and liquidity. This is common with ECN or STP brokers. And it can be very low during high-liquidity periods (e.g., 0.1–1 pip on majors). During news events or low-volume hours, floating spreads get wider sharply.
Pros:
- Tighter spreads during normal conditions.
- Better pricing for scalpers and high-frequency traders.
Cons:
- Can spike during economic news or off-peak hours.
- Costs are less predictable, which may affect stop-loss or break-even planning.
How the Spread Impacts Profit/Loss
The spread affects your trade the moment you enter into trading. How? A wider spread means you start further in the negative. In contrast, a tighter spread means less to recover before reaching a profit.
Let’s understand things with an easy explanation.
Wider Spread = Higher Cost to Trade
When you buy, you pay the ask price. Right? When you sell, you receive the bid price. The gap between those two is the spread, and here you begin your trading.
A wide spread means a bigger gap between your entry and exit prices. So, your trade needs to move where you speculated the price to move before you break even. This is especially tough in fast-moving or low-liquidity markets. In such a situation, the spread can suddenly widen.
For example:
If the spread is 5 pips, your trade must gain at least 5 pips just to reach breakeven before any actual profit.
Narrow Spread = Lower Cost, Faster Break-Even
A tighter spread gives you a smaller hurdle to cross. This is ideal for scalpers or day traders. Because this type of trader works with small price moves. With less distance between entry and exit, it’s easier to close trades in profit.
Conclusion
When you start your trading journey, it can feel overwhelming, especially when unfamiliar terms like bid, ask, and spread pop up on your screen. These aren't just numbers. They affect how your trades open and close and how much you actually make or lose.
Today, we’ve broken down what each term means, how they work together, and why they matter in real trading. Now, you can trade with confidence.
FAQ
1. Is the last price always the same as the bid or ask?
Not always. The last price is the rate of the most recent completed trade. The bid and ask are current offers in the market. Prices can shift between trades, so they may not match.
2. Why do some spreads seem bigger than others?
Spreads vary based on liquidity, trading volume, and market volatility. Less popular or more volatile assets usually have wider spreads due to fewer buyers and sellers.
