Bid and Ask Prices: What Investors Need to Know About Offer and Bid

When entering the world of investing, the terms that often appear are bid and offer. The offer means you need to understand the meaning and differences between the two in order to develop an effective trading strategy. This article will help you clearly understand how the financial markets operate.

Price Evaluation in the Market: How Does It Work?

The prices we see in the stock market are not fixed. They result from the actual buying and selling decisions of numerous investors, both individuals and institutions. Buyers and sellers try to find each other, causing prices to move according to the dynamics of supply and demand.

When the demand for securities exceeds the available quantity, prices tend to rise. Conversely, when there is more supply than demand, prices tend to decrease. Understanding this is fundamental for those who want to buy, sell, or trade stocks and other financial assets.

Bid (Buy Price): What is the Buyer’s Demand?

Bid or buy price indicates the maximum amount a buyer is willing to pay for a security or stock. This figure reflects market demand. The more buyers there are willing to pay higher prices, the higher the bid price will be.

The reason why the bid price is lower than the asking price is that buyers want to get the best value for their purchase. They often offer prices below the initial asking price, hoping that sellers will accept negotiations.

Bids can be placed both online and through brokers or agents. For example, when an investor wants to sell shares, they need to check how much people are willing to pay for those shares at that moment.

Offer (Sell Price): Seller’s Expectation

Offer is the selling price that sellers are willing to accept for their securities. This figure indicates the minimum value sellers are unwilling to go below. In actual trading, investors need to place orders in the market to acquire the asset at the current offer price.

When investors want to buy shares, they consider how much someone is willing to sell for. The offer price is the lowest price that sellers should receive. When talking about an offer, it refers to a sale, so this price reflects the bargaining power of the seller.

Why Pay Attention to Bid and Offer?

At first glance, bid and offer might seem like minor figures that are not important. But in reality, they are very useful.

First, bid and offer provide information about market orders. While market orders facilitate execution of trades, they do not guarantee a specific price, as they usually close near the current bid or offer prices.

Second, bid and offer help better understand limit orders and stop-loss orders. These tools depend on the movements of bid and offer prices, allowing investors to control risk and trade safely.

Therefore, bid and offer are among the most important components in securities trading. Understanding bid-ask strategies will help you become a more experienced trader.

Reading Bid and Offer: Basic Techniques

Investors can interpret bid and offer from various perspectives:

Scenario 1: Narrow Bid and Narrow Offer
This indicates a potential trend but still lacks trading volume. People are not fully engaged in trading yet. If you notice continuous buying, keep an eye on it. As trading volume increases, there is a high likelihood that prices will continue to move.

Scenario 2: Narrow Bid and Wide Offer
If trading occurs continuously with a wide bid-ask spread, it could be an interesting opportunity because institutional investors are preparing their moves. The offer price may gradually increase.

Scenario 3: Wide Bid and Narrow Offer
This situation often occurs at the end of a trend. If buying continues in this pattern, it’s safe to pass. This signals that price movement is slowing down.

Scenario 4: Wide Bid and Wide Offer
This is the period of highest trading volume. If it occurs at the start of a trend or breakout point, prices may surge. But if it’s at the end of a trend, it’s best to avoid.

Advantages and Disadvantages of Bid and Offer

Advantages

Bid Side:

• Helps sellers know the prices buyers are willing to pay, aiding in valuation.
• In a (bull market), high bid prices indicate valuable stocks, encouraging buyers to pay more, expecting to sell at higher prices.

Offer Side:

• Applicable in almost all markets, such as stocks, futures, derivatives, and forex markets.
• From a seller’s perspective, the offer price shows the minimum acceptable price.

Disadvantages

Bid Side:

• Bid prices are lower than offer prices, which can hinder transactions. Sellers may be reluctant to sell at bid prices.
• Bid prices alone cannot determine the true value of an asset, as they depend on market sentiment, investor confidence, and fear.
• In modern electronic trading systems, thousands of transactions occur daily, making direct contact between buyers and sellers impossible.

Offer Side:

• Offer prices are often higher than the current market price, requiring buyers to pay more, increasing purchase costs.
• Many new investors are unaware of the offer price and how it differs from the market price.

Main Differences Between Bid and Offer

Real-World Example

Somsak is a retail investor who wants to buy shares of Company A today. He sees that the last traded price was $173 per share. He decides to buy 10 shares, expecting to pay around $1,730.

When placing his order, he is surprised to see that he must pay $1,731 instead. After inquiring, he realizes that the $173 he saw is only the last traded price. The actual price he pays is ($173.10), which is the current offer price of the stock.

The $0.10 difference per share is the bid-ask spread, which is the broker’s fee.

Summary of Key Points

Understanding bid and offer is essential for anyone wanting to buy or sell securities. Especially for assets with low liquidity, large-cap stocks may have high demand and supply, resulting in minimal spreads. Small-cap stocks or certain bonds may have significant spreads depending on asset price perceptions.

Investing in the stock market has proven to be an effective way to generate income. Returns can help achieve short-term and long-term financial goals. However, it requires time to study, understand, and master the investment market. Knowledge of bid and offer is one of the fundamental basics that should be established beforehand.