Bid and Ask Explained
When you trade, or even look at a chart, you will often see two prices. The bid price generally paints new prices as a candle on the chart, while the ask price generally isn’t seen unless you set your chart settings to ‘show ask price’. The bid and ask are simply the prices which you can enter and exit trades at market depending on whether you are selling or buying the financial instrument. As a quick reference, you buy into the Ask price, and sell into the Bid price. An easy way to remember is that it’s always the worst price of the two.
“An easy way to remember is that it’s always the worst price of the two.”
Bid
Bid is the price where people will use to sell right now. The bid is also the price that generally paints a candle to a chart. The bid price generally reflects the price of the asset or financial instrument being traded, whereas the ask price is there to factor in the spread in forex trading or CFD’s.
Ask
The Ask price is the market price where people will buy right now in a market order. It is often not a visible price, as having two prices can get confusing. The ask price fluctuates depending on the spread of the broker, or in other words, the brokerage cost of placing the trade in forex or CFD’s. As an example, if there was no spread and effectively a free trade, the bid and the ask price would be the same.
Bid and Ask in Share Trading
Share trading is a little different to forex and CFD’s. They often have less liquidity and the difference between the bid and the ask can be due to the price people are willing to buy and sell at. This means the prices shown are people buying or selling their actual stock to the market. In comparison to Forex, where generally the broker takes on your trade as a market maker and the difference between bid and ask is purely spread (the terms used for a broker fee in forex or CFD trading).
“Remember, buy at the ask, sell at the bid”
Bid vs Ask
When bid vs ask is very different, it can mean a few things. One, it could be illiquid at the time of trading, the broker may have placed higher spreads on the asset or the market is experiencing some massive volatility. Often during times of volatility, the bid and the ask will widen. This is particularly the case when large, high impact news announcements occur relating to what you are trading.