Bid and Ask - Explained
What is Bid and Ask?
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Table of ContentsWhat is Bid and Ask?How Does Bid and Ask Work?Who Benefits from the Bid-Ask Spread?Academic Research on "Bid and Ask"
What is Bid and Ask?
The bid and ask is a term used in the stock market to describe the lowest amount sellers are willing to sell their stock and the highest amount buyers are willing to pay for the stock. The bid and ask is otherwise called bid and offer, this is the best prices buyers and sellers are willing to transact stock in the marketplace. While the bid price refers to the highest price a buyer offers to buy a security, the asking price is the minimum amount a seller wants to sell the security. Without the bid and ask price, there can be no smooth transactions in the stock market.
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How Does Bid and Ask Work?
Oftentimes, there is a spread between the bid and ask in the marketplace. This is the difference between the amount quoted by the buyer and seller for the purchase and sale of stock. In some cases, the spread might be small while in other cases, there is a huge spread between the prices quoted by the buyer and seller. How much difference is recorded between the asking price and bid price of a security is an indicator of how liquid the asset or security is.
Who Benefits from the Bid-Ask Spread?
Generally, the bid and ask price affects the market maker the most, this is the person that quotes the price. How much of a spread exists between the bid and ask price determined the amount of profit that the market maker would earn. There are diverse factors responsible for the bid-ask spreads, the type of security, current market price and other market factors that determine the degree of a bid-ask spread. Also, market conditions affect the benefit that a market maker would derive from a bid and ask spread. For instance, when there is a crisis in the market, investors might be unwilling to buy securities at prices above the market threshold.