Bid Price

The bid price, often simply called the bid, is the highest price at which someone is currently willing to buy an asset. It is the price a seller receives if they want to sell straight away rather than wait for a better offer. Every quoted market, from shares, bonds and currencies to commodities and cryptocurrencies, displays a bid alongside an ask price, the lowest price at which someone is willing to sell.

The gap between the two is the bid-ask spread, a basic measure of trading cost and liquidity. Bids come from investors, traders and market makers, who post buy orders in an order book or quote prices to clients. In foreign exchange, the same idea applies to currency pairs and is covered in the entry bid FX rate. The bid should not be confused with a bid in an auction or takeover, although the underlying idea of an offer to buy is the same.

Picture a second-hand car market. Several dealers are standing around offering to buy your car: one says $8,000, another $8,200, a third $8,350. If you want to sell right now, the best you can get is $8,350. That is the bid. Meanwhile, if you wanted to buy a car like yours, the cheapest seller is asking $8,600, which is the ask.

Financial markets work the same way, only much faster and on screens. The bid is the best offer to buy on display at that moment. If you sell immediately, you accept it. If you want more, you can ask for a higher price, but then you have to wait and hope a buyer comes along.

On an exchange, buyers place limit orders stating the most they will pay. These orders are ranked from highest to lowest, and the highest one is the best bid. Key points include:

• Size. Each bid has a quantity. The best bid may be for only a small amount, and a larger sale will be filled partly at lower bids, causing slippage.
• Depth. The total quantity of bids at and below the best price shows how much selling the market can absorb without a large price fall.
• Priority. Bids at the same price are usually filled in the order they were placed.
• Market orders. A market order to sell executes immediately against the best available bids.

In dealer markets, such as many bond and currency markets, there is no central order book. Dealers quote their own bid and ask prices to clients, and a client compares quotes from several dealers to find the best bid.

The bid changes constantly as buyers enter, raise, lower or cancel orders. It tends to rise when demand increases, for example after good news, and to fall when buyers step back. Market makers adjust their bids based on their inventory, the volatility of the asset and the risk of trading with better-informed counterparties. When an asset is heavily traded, bids are dense and close to the ask; when it is thinly traded, the best bid may sit well below the last traded price. In stressed markets, bids can disappear altogether, a sign of falling liquidity.

Centralized crypto exchanges display bids in an order book much like a share exchange. On decentralized exchanges that use automated market makers, there is no list of individual bids; instead a pricing formula gives the price at which the pool will buy a token, which falls as more is sold into it. Large visible bids in crypto order books, known as buy walls, are watched by traders as signs of support, although such orders can be withdrawn at any time and are sometimes placed to mislead, a practice known as spoofing. Because prices for the same coin can differ between exchanges, traders compare bids across venues, and gaps create arbitrage opportunities.

Investors look at the bid to know what they would actually receive when selling, rather than relying on the last traded price, which may be out of date in a quiet market. Portfolio valuations for some assets, such as bonds and funds, may use bid prices to give a conservative estimate. In mutual funds, the price at which investors sell units back to the fund was historically called the bid price, with a higher offer price for buyers. When placing a sell order, a trader who wants certainty of execution can sell at the bid, while one who wants a better price can place a limit order above it and accept that it may not fill.