Bid Price: Definition and Overview A bid price is the highest amount a buyer is willing to pay for a security, asset, commodity, or service. It is typically lower than the ask (or offer) price—the minimum amount a seller will accept. The difference between them is called the bid-ask spread, an important indicator of market liquidity and how market participants, including market makers, earn profits. How a Bid Price Works
* Bids can be placed by individual buyers, multiple competing buyers, or market makers who post continuous quotes.
* A bid may be solicited (in response to a seller) or unsolicited (posted even if no seller is actively offering).
* When several buyers submit increasing bids, a bidding war can push the final transaction price up, benefiting the seller.
Bid-Ask Spread
* The bid-ask spread = ask price − bid price.
* A narrow spread generally indicates high liquidity and lower trading costs; a wide spread points to lower liquidity and higher implicit transaction costs.
* Market makers often capture the spread as compensation for providing liquidity and bearing inventory risk.
National Best Bid and Offer (NBBO)
* Quotes commonly show the National Best Bid and Offer (NBBO), which aggregates the best available bid and offer across all exchanges where a security trades.
* The best bid and best offer may originate from different venues.
Bid Size and Liquidity
* Bid size is the quantity a buyer is willing to purchase at the bid price (e.g., 500 shares at $50).
* Ask size is the amount sellers offer at the ask price.
* Comparing bid size and ask size helps assess supply and demand and the depth of the market.
Orders: Market vs. Limit
* Market orders execute immediately at the best available price: buyers typically pay the ask, sellers receive the bid.
* Limit orders specify a price: a buy limit can be placed at the bid (or lower), and a sell limit at the ask (or higher). Limit orders give price control but may not execute.
* Selling at the market and accepting the current bid is commonly called "hitting the bid."
Example If a stock is trading between $10 and $15 and a buyer is only willing to pay $12, they can place a buy limit order at $12. Their bid price is $12; execution occurs only if a seller accepts that price. Key Takeaways
* The bid price is the highest price a buyer will pay; the ask is the lowest a seller will accept.
* The bid-ask spread reflects liquidity and trading costs.
* Bid size indicates how much can be bought at the bid price and helps gauge market depth.
* Use market orders for immediate execution and limit orders for price control.
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