What Does Ask Mean in Trading?

What is ask?

In trading, ask refers to the minimum price a seller is willing to sell a security, asset, commodity, or currency for at the present moment.

Ask is also called the ask, ask price, asking price, or the offer price.

Ask represents the supply aspect of a transaction.

In addition to the ask price, the ask quote might also specify the amount of the particular security or asset available to be sold at the quoted price.

Contrarily, bid, also referred to as bid price or the bid, refers to the maximum price that a buyer is willing to pay for a financial instrument, or asset at the present time.

The bid price represents the demand aspect of a transaction.

Typically, the ask price is higher than the bid price.

Buyers and sellers are constantly negotiating, trying to get the most favourable prices. For the seller, the ask price needs to be as high as possible, while the buyer prefers the bid price as low as possible.

Orders will only be filled (executed) when a buyer and seller settle on an agreed price.

There is a difference between the ask price and the current price of the item traded. The current price is a historical price, the last price at which a security, commodity, or currency is sold/bought. The market price is the original asking price of the security, commodity, or currency.

Typically, the last price (current price) will be lower than the original asking price (market price) due to negotiations regarding the asking price and bid price between the seller and buyer.

Ask and bid are terms used in almost every global financial market, including stock exchanges, the forex market, and bond markets.

Examples of an ask (offer price)

• Stock exchange (stock market)

A trader offers a potential buyer an asking price of R55.20 x 1 500, meaning that someone is willing to sell 1 500 shares for R55.20 per share.

• Forex market

A broker in South Africa who wants to buy 500 euros for a client, obtains a quote of EUR 1 = ZAR 17.70 / ZAR 17.87.

The last figure in the quote, (ZAR 17.87) is the ask. This means that the client must pay R8 935 (R17.87 x 500) for 500 euros.

The bid and ask can also be identified in a bid-ask spread. For instance, the currency pair EUR/USD shows a spread of 1.1239/1.1245. As already mentioned, the asking price is higher than the bid price. Therefore, 1.1245 is the ask, which means that a buyer is required to pay $1.1245 for one euro.

The bid-ask spread

The bid-ask spread also called the bid and ask spread, refers to the difference between the bid price and the ask price of a financial instrument, such as a security, a currency pair, or a commodity.

Put differently, the bid-ask spread is an indication of the gap between the ask price and the bid price.

Uncertainty over price movements and exceptional volatility in a financial market can cause spreads to widen considerably.

Wider spreads make it difficult to generate profits because the security or asset is usually being purchased at the high end of the spread and sold at the low end.

The bid-ask spread as an indicator of the liquidity of a market

Ask and bid prices are indicated in real-time and are constantly changing, implying that the bid-ask spread is also changing.

Changes in the bid-ask spread is a key indicator of the liquidity of a particular security, commodity, currency pair, or financial market.

A large number of buy and sell orders often cause high liquidity in a financial market, enabling traders and investors to buy and sell closer to the market value price of the particular security, asset, or currency traded.

Hence, when the bid-ask spread narrows, the more liquid a financial market or security becomes. In other words, a smaller spread equals better liquidity.

Conversely, in a less liquid financial market, the bid-ask spread widens because its tougher to sell and buy close to the market value due to a lack of trade volumes.

The size of the bid-ask spread will differ from one security/asset/commodity to another security/asset/commodity, mainly because of each asset’s varying liquidity.

Certain markets are more liquid than others, as can be seen in their lower ask-bid spreads. For instance, the forex market is the most liquid market in the world, making its bid-ask spread one of the smallest (one-hundredth of a %), which is calculated in pips.

Contrarily, shares of companies with a small market capitalisation (small-cap) are less liquid, causing spreads of 1 to 2% of the lowest ask price of the shares.

Besides liquidity, supply and demand also influence the bid-ask spread of a security or commodity.

Stock market spreads

In a stock market, the bid-ask spread is indicated as a percentage.

For example: Assume the shares of a company trade at R20.25 / R20.50. The bid price is R20.25 and the asking price is R20.50. In this case, the bid-ask spread is 25 cents. As a percentage, the spread is 1.19% (R0.25 / R21.00).

Forex market spreads

Bid-ask spreads also occur in the forex market, especially as impacted by diverse currencies. Because of the difference in their exchange rates, there is typically a bid-ask spread between the currencies of the two countries.

Comparing a U.S dollar to the euro, a gap (spread) exists between the two currencies. It is inevitable that where cross-currency transactions are executed, bid-ask spreads occur.

The forex market uses pips to measure the bid-ask spread of currencies. A pip represents a $0.0001 change in price movement. The value of a pip is calculated by multiplying the volume traded by 0.0001.

For instance, if the EUR/USD currency pair had a bid price of 1.1300 and an offer price of 1.1305, the bid-ask spread would be 5 pips (1.1305 – 1.1300).

This article does not intend to provide investment or trading advice. Its aim is solely informative.