What is Ask, Bid and Spread?
The term bid and ask (also known as bid and offer) reflects a two-way price quotation. Particularly it indicates the best available price at which an instrument can be sold and bought at a given time.
The bid price shows the maximum price which buyer can afford to pay for an instrument.
The ask price on the contrary represents the minimum price that is suitable for a seller to receive a certain asset. Spread is the deriving feature from ask and bid.
The spread reflects the difference between the bid and the ask prices and it is usually used as a measurement indicator of the liquidity of the certain asset. In overall, the smaller spread means better liquidity.
Bid-ask spreads may vary widely and it depends on the asset and the market. Spread is a reflection of the supply and demand for a particular asset or a currency pairs particularly. Supply and demand is the main economic law reflecting the interest of market participants in buying and selling an asset.
The bids represent the demand, and the asks represent the supply for it. Popular currency pairs like EURUSD or USDJPY have very tight spreads, while currencies of emerging market may have a widen spreads that would not be suitable for scalping strategies.
Let’s take an example, if the current price quotation for EURUSD is 1.23491 / 1.23495, an investor, who is willing to buy it at the current market price, would buy it at 1.23495 price, while another investor who wishes to sell it at the current market price would do it at 1.23491 price.