What Is Bid And Ask Price? - Bid Ask Spread Definition
Whether you are a seasonal money investor or a professional one trader, the concept of ask and bid price is compulsory for you.
In forex trading, you will find this term. However, the term bid-ask price is also applicable to stock, bonds, and other securities.
Before jumping to the exact point, let’s start from the root.
Here, we are starting with a short introduction of the Forex trading.
Another name of Forex trading is currency trading. At the very beginning, people used to trade with the help of different kinds of commodities. That trading method was known as barter trading.
With the invention of currencies, the trading scenario changed. It became much more efficient and quick than the previous time.
Currency trading gave the economy a new era. The Foreign Exchange Market is the most liquid market in the trading marketplace.
The market is decentralized. For that reason, the central bank has no authority to control the process of the transaction.
You can trade 24 hours and 5 days a week. Fortunately, it is possible to trade at the weekend. Remember, the trading time zone is different for traders from different countries.
In the trading market, traders exchange one currency for another currency. The currency is traded into pairs.
You have to predict the future value of the currency pair to earn a profit.
To buy and sell currency form the trading broker, traders need to go through some prices. These prices are known as Bid and Ask price.
In this article, I will discuss the definition of the bid-ask price, the difference between these two prices, bid-ask spread, and a few other important topics.
Now, start with the definition of bid price and ask price.
What Is Ask Price
The other name of the asking price is the offering price. The marker sells the currency at the Ask price. Traders can buy currency pairs at Ask price.
As a trader, the price that is demanded from you, when you want to buy a currency pair or stock or other securities is the asking price.
In the seller’s point of view, this asking price is known as offering price. So, the seller is offering this price to his client.
What Is Bid Price
The bid price is the selling price of the currency pair. Eventually, the trader is willing to give you the currency pair or other securities at the bid price.
It is the price at which the market buys a currency.
Usually, the bid price is lower than the ask price. Till now, whatever we have stated is from the traders perspective.
From the broker’s perspective, the bid price is the buying price and the ask price is the selling price.
To sell the currency pair, the price he demands is the ask price. When the buyer is ready to buy the currency pair at that price is the bid price.
How much quoted currency is required for one unit of the base currency depends on their relative rate.
It is somewhat confusing for new traders. Therefore, we are giving an example to make this clear.
Suppose, in the trading market, you wanted to open a position of EUR/USD. In the marketplace, there are two-value points. One is the ask price and other is the bid price.
Here, the base currency is EUR and the quoted currency is USD. So, the bid price is the highest price someone will pay.
For example, a trader is willing to take $1.1236 to sell EUR/USD pairs.
What Is Bid-Ask Price
If you are a trader, then you want to buy the base currency of EUR and the seller wants to sell EUR.
However, you are both working with the same value point (ask price) from a different perspective.
Here is an example for more clarification. We are just indicating two important points, which will help you to remember the term.
- Ask price formula: The seller sells the currency pair at $1.2093. This price is the seller ask price. At this point, the trader is willing to buy the pair.
- Bid price formula: When a trader is willing to pay $1.2690 for a particular currency pair, the price is known as the trader’s bid price. At this point, the seller is willing to sell the currency pair.
Do you know what is the main focus for market makers?
You can post your valuable answer in our comment section.
Remember, a market maker earns a tiny amount of profit from the difference between the bid-ask price. The difference is considered as the bid-ask spread.
Before the spread part, have a look at the differences between the Bid price and the Ask price.
Differences Between Bid And Ask
The difference between the bid price and the ask price is that the ask price always above the market price and the bid price usually lower than the market price.
In the term of the real economy- “market price is the economic price for which a good or service is offered in the marketplace”
The market price is always equal to the market value.
So, in the trading market, the trader considers the price as the current price of the market.
Bid-Ask Spread
Bid-Ask spread is the commission fee given by the traders to their broker. It is a key indicator of liquidity.
The broker does not charge any transaction fees from traders. The trader buys the currency pair at an offer price and sells it at the bid price.
The difference between these two prices is called the spread or the broker’s profit margin.
The formula of the bid-ask spread is = (Ask price- Bid price) X 100/Ask Price
For example, if the current bid price for the EUR/CAD currency pair is 1.678 and the current offer price is 1.699, this means that currently you can sell the EUR/CAD at 1.678 and buy at 1.699.
After the calculation of the bid-ask spread, the answer is (1.24pips) and this is the profit margin of the market maker.
Final Words
Remember that any type of financial market carries a high risk for traders. It is necessary to check the spread before placing a larger number of trading orders.
Generally, a high spread can lower your profit level. It is necessary to have experience and knowledge while trading the marketplace.
