Today’s market is driven, among other things, by the law of supply and demand. If people ask for milk, farmers produce milk. They sell it for 80 cents, and you buy it for 80 cents. But what if your country did not produce milk, how much would you pay for a liter of milk? 1 euro, 5 euros, how much would the farmers ask for their milk?
In this sense, both buyer and seller must agree on the best price for both, a purchase price that benefits the buyer and a sale price that benefits the seller. The milk production example answers, in very simple terms, the question of this educational article: What is the Bid & Ask price?
The Bid is the highest price a buyer is willing to pay (to buy), and the Ask is the lowest price a seller is willing to offer for his product (to sell). Therefore, the Bid is the maximum you can pay, and the Ask is the minimum you can get for a product.
Where can I see the Bid and Ask price for an asset?
In trading, when you want to invest in a specific asset, you can see the two prices, the Bid or Buy price and the Ask or Sell price next to each trading pair as shown in the following image.
How do I use the Bid and Ask price when I trade?
If you want to buy, you have to take as reference the Bid price and if you want to sell, your reference will be the Ask price. In other words, when trading assets such as forex, indices, oils, metals, and cryptocurrencies the bid price is the highest price you must pay to open a long position (buy a specific asset) and the ask price is the lowest price you are going to pay to open a short position (sell a specific asset).
What affects Bid and Ask prices?
Bid and Ask prices can be determined by many factors, but in trading, these two prices can change according to the trading volume of an asset.
Trading volume is nothing other than the number of trades an asset registers during a specific period of time. For example, if a specific forex pair becomes attractive to traders and they start trading it for a whole day, the number of trades for this asset will increase, increasing the asset’s volume for the day.
Trading note: Market sentiment can be measured by the trading volume of an asset. If there is a lot of activity, the sentiment for the asset is thought to be optimistic, but if there is little movement, the sentiment is thought to be pessimistic.
The difference between the Bid and Ask price is called the spread and is usually the commission charged to traders by the broker. In our next educational article, we will analyse what a spread is.
In short: The bid and ask prices of an asset are the prices at which you can buy and sell the specific asset. Generally, they are determined by the trading volume of the asset. The result of subtracting these two prices generates the spread.
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