The bid price represents the maximum price that a buyer is willing to pay for a share of stock or other security. The ask price represents the minimum price that a seller is willing to take for that same security.
A trade or transaction options bid and ask after the buyer and seller agree on a price for the security which is no higher than the bid and no lower than the ask.
The difference between bid and ask prices, or the spread, is a key indicator of the liquidity of the asset. In general, the smaller the spread, the better the liquidity.
Key Takeaways The bid price refers to the highest price a buyer will pay for a security. The ask price refers to the lowest price a seller will accept for a security. The difference between these two prices is known as the spread; the smaller the spread, the greater the liquidity of the given security.
Who Benefits from the Bid-Ask Spread?
The bid-ask spread works to the advantage of the market maker. The spread represents the market maker's profit. Bid-ask spreads can vary widely, depending on the security and the market. Blue-chip companies that constitute the Dow Jones Industrial Average may have a bid-ask spread of only a few cents, while a small-cap stock that trades less than 10, shares a day may have a bid-ask spread of 50 cents or more.
The bid-ask spread can widen dramatically during periods of illiquidity or market turmoil, since traders will not be willing to pay a price beyond a certain threshold, and sellers may not be willing to accept prices below a certain level.