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 an offered price, or “ask” price, which is the price at which people are willing to sell. The difference between the two prices is called a bid-ask spread.
Bids are made continuously by market makers for 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.
Bids usually comprise two elements:
- The price which the buyer is willing to pay
- The quantity of the financial instrument they are looking to purchase.
A trade is executed when a matching bid and ask are combined.
For example, a trader bidding 110.25 for 1,000 units of USD/JPY will see their trade executed when a seller agrees to that price and level.
The bid (the price at which you can sell an asset) is quoted as lower than they ask, and the difference between the two is known as the spread.
Buying and Selling at the Bid
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 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.”
Bid Size
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.
Example of Bid Price
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.