What are Bid and Offer: Key Terms Every Trader Must Know

When trading stocks and securities, you’ll often encounter the terms Bid and Offer. These two terms are fundamental in helping you understand how the financial market operates. The Bid is the purchase price, and the Offer is the selling price. The difference between them is called the “spread,” and it is crucial to your trading strategy.

Understanding Bid: The Buy Price Every Trader Should Know

Bid or the purchase price refers to the highest price a buyer is willing to pay for a security or stock at a given time. This number reflects the demand from buyers in the market. When demand increases, the Bid price tends to rise accordingly.

Bids can be placed online or offline through brokers or agents. For example, if you are a seller wanting to know how much you’ll get, you look at the Bid price because that is what buyers are willing to pay. The Bid price is usually lower than the Offer price because buyers tend to bid below the asking price to maximize their profit.

What is Offer: The Seller’s Side in the Market

Offer or the selling price is the minimum amount a seller is willing to accept for their securities. This price reflects the quantity of shares or goods the seller is willing to deliver to the market. Investors looking to buy shares should consider whether the Offer price is fair before making a decision.

The Offer price is typically higher than the Bid price because sellers want to get the best return from their sale. As a buyer, the Offer price is what you will pay to acquire the stock at that moment. Buyers can accept or reject this by placing a Market Order, which executes the trade at the current Offer price.

Benefits of Understanding Bid and Offer in Trading

Understanding Bid and Offer is not trivial; it is a key part of assessing market liquidity. The spread between Bid and Offer indicates how active the market is. A narrow spread suggests high liquidity, meaning many buyers and sellers, which makes entering and exiting positions easier and faster.

Additionally, studying Bid and Offer helps you use Limit Orders effectively. Instead of placing an immediate Market Order, you can set a Bid lower than the current price or wait for the Offer to drop to your desired level. This is also useful for setting Stop Loss orders to prevent unexpected losses.

How to Read Bid and Offer: Practical Techniques for Traders

There are several levels of importance when analyzing Bid and Offer:

Narrow Bid and Narrow Offer – Indicates a potential trend but not enough trading volume yet. Watch for increased buying activity; if volume rises, the price may move.

Narrow Bid and Wide Offer – Continuous buying with a wide Offer suggests large players are accumulating positions and waiting to cancel the Offer to push the price higher.

Wide Bid and Narrow Offer – Usually occurs at the end of a trend. If you see buying activity with this pattern, it’s best to pass, as the price may stall and lack momentum.

Wide Bid and Wide Offer – Represents high volume. If this occurs at the start of a trend or breakout, prices may surge further. At the end of a trend, it’s best to avoid risk.

Clear Differences Between Bid and Offer

Although related, Bid and Offer have distinct differences. The Bid is what the seller receives, while the Offer is what the buyer pays. The difference is called the “spread.”

In stock trading, as prices rise, buyers are willing to pay higher prices, expecting the stock to continue upward. Sellers aim for maximum profit by setting higher Offers. In a bear market, buyers reduce their Bid prices out of fear of further declines, and sellers are willing to accept lower prices.

Considering Volume: If multiple buyers place bids, the highest bid wins, benefiting sellers with better prices. However, Offers are typically set by a single seller, so this dynamic is less common.

Spread (Spread): The spread is positive when the Offer price exceeds the Bid. A high spread indicates a large difference, making it harder to profit because you buy high and sell low. A narrow spread reduces trading costs.

Real-World Trading Example: Bid and Offer

To clarify, here’s a real trading example:

Somsak is a retail investor wanting to buy shares of security A. He notices on his trading app that the Bid is $172.90, and the Offer is $173.10. The spread is $0.20.

When Somsak places a Market Order to buy 10 shares, he will purchase at the Offer price of $173.10 per share, totaling $1,731. He observes that he paid $0.20 more per share than the current Bid price.

Later, if the stock price rises and the Bid moves to $174.50, Somsak decides to sell 10 shares with a Market Order, receiving $1,745 (174.50 × 10). His profit is $14 ($1,745 - $1,731). Despite the spread, the overall price has increased, and he gains.

Summary: Why Bid and Offer Matter

Bid and Offer are fundamental to the financial markets. A deep understanding of these concepts makes you a smarter, more effective trader.

Assets have different spreads; large-cap stocks often have minimal spreads due to high demand and supply, while smaller stocks or bonds may have more noticeable spreads.

Trading in the stock market has proven to be an effective way to generate income. Returns can help you achieve short-term and long-term financial goals. However, mastering the market requires study and practice. Knowledge of Bid and Offer is the first crucial step on your journey to becoming a successful trader.