Bid and ask are the fundamental definitions that every trader gets to learn, no matter what market he’s on and in what assets he trades in.
The bid-ask spread seems like a simple concept, yet it’s an important indicator. For instance, is a reflection of the supply and demand for a particular asset. The bid represents demand and the ask represents supply for an asset. The depth of the “bids” and the “asks” can have a significant impact on the bid-ask spread, making it widen significantly if one outweighs the other or if both are not robust. Market makers and traders make money by exploiting the bid-ask spread and the depth of bids and asks to net the spread difference.
Bid Price
The bid price for a given asset is the maximum price that someone is willing to pay for that asset. You can think of this as the “demand” side of “supply and demand.”
Ask Price
The ask price for a given asset is the minimum price for which someone is willing to sell that asset. You can think of this as the “demand” side of “supply and demand.”
Bid-Ask Spread
The bid-ask spread is the difference between the highest bid price and the lowest ask price for a given asset. This spread is the profit that market makers earn by buying and selling the asset on behalf of investors. As an asset’s liquidity increases, this spread decreases correspondingly.
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