Bid Price Explained: Definition, Examples, and Comparison With Ask Price

What Is a Bid Price?

A bid price is a price for which somebody is willing to buy something, whether it be a security, asset, commodity, service, or contract. It is colloquially known as a “bid” in many markets and jurisdictions.

Generally, a bid is lower than the "ask" price, which is what sellers are willing to accept. The difference between the two prices is called a bid-ask spread​​​​​​​.

Bids are made continuously by market makers for a security and may also be made in cases where a seller requests a price where they can sell. Sometimes, a buyer will present a bid even if a seller is not actively looking to sell, in which case it is considered an unsolicited bid.

How Bid Prices Work in Financial Markets

The bid price is the amount of money a buyer is willing to pay for a security. It is contrasted with the sell (ask or offer) price, which is the amount a seller is willing to sell a security for. The difference between these two prices is referred to as the spread. Market makers (MMs) profit from the spread, so a larger spread means more profit.

Bid prices are often set to achieve a desired outcome for the bidder. For example, if the ask price of a good is forty dollars, and a buyer wants to pay thirty dollars for the good, they might make a bid of twenty dollars, and appear to compromise and give up something by agreeing to meet in the middle—exactly where they wanted to be in the first place.

When multiple buyers put in bids, it can develop into a bidding war, wherein two or more buyers place incrementally higher bids. For example, a firm may set an asking price of five thousand dollars on a good. Bidder A might make a bid of three thousand dollars. Bidder B may offer three thousand and five hundred dollars. Bidder A might counter with four thousand dollars.

Eventually, a price is agreed upon when a buyer makes an offer others won't beat. This is quite beneficial to the seller, as it puts a second pressure on the buyers to pay a higher price than if there was a single prospective buyer.

In the context of stock trading, the bid price refers to the highest amount of money a prospective buyer is willing to spend for it. Most quote prices as displayed by quote services and on stock tickers are the highest bid price available for a given good, stock, or commodity. The ask or offer price displayed by said quote services corresponds directly to the lowest asking price for a given stock or commodity on the market. In an options market, bid prices can also be market-makers, if the market for the options contract is illiquid or lacks enough liquidity.

Strategies for Buying and Selling at Bid Prices

Investors and traders that initiate a market order to buy will typically do so at the current ask price and sell at the current bid price. Limit orders, in contrast, allow investors and traders to place a buy order at the bid price (or a sell order at the ask), which could get them a better fill.

Those looking to sell at the market price may be said to "hit the bid."

The Importance of Bid Size in Trading

In addition to the price that people are willing to buy, the amount or volume bid for is also important for understanding the liquidity of a market. Bid sizes are typically displayed along with a level 1 quote. If the quote indicates a bid price of $50 and a bid size of 500, that you can sell up to 500 shares at $50.

Bid size may be contrasted with the ask size, where the ask size is the amount of a particular security that investors are offering to sell at the specified ask price. Investors interpret differences in the bid size and ask size as representing the supply and demand relationship for that security.

Bid Price Example: Buying Shares in Company ABC

Suppose Alex wants to buy shares in company ABC. The stock is trading in a range between $10 and $15. But Alex is not willing to pay more than $12 for them, so they place a limit order of $12 for ABC's shares. This is their bid price.

The Bottom Line

Bid price is the price a buyer is willing to pay for a security or asset. The difference between this and the price a seller is asking is the bid-ask spread. This spread serves as a measure of market liquidity and market maker profits. Understanding bid size is crucial for gauging market liquidity and the supply-demand dynamics. Investors can use market and limit orders to buy at the bid price or sell at the ask price, affecting the final transaction cost.