What it means
Every traded market shows two prices at once. The bid is the best standing offer to buy, the ask is the best standing offer to sell, and a trade happens when someone accepts one of them or when the two meet.
Screens that show a single price are usually showing the last traded price or the midpoint, neither of which is necessarily available to you right now. The practical rule is that you sell at the bid and buy at the ask, always on the less favourable side.
This is why a portfolio valued at the midpoint is worth slightly less than that if it actually has to be sold, a difference that matters for funds reporting daily valuations and for companies marking financial instruments to market. Depth sits behind the headline bid.
The best bid might only be good for 500 shares, with the next buyers waiting several cents lower, so selling a large block walks down through progressively worse prices. Professional traders therefore look at the whole order book rather than the top line, because the quoted bid describes the first slice of a sale, not the average price of the whole.
In quote-driven markets such as corporate bonds or foreign exchange, the bid is set by a dealer rather than by a queue of public orders. The dealer commits its own capital and quotes a bid it is happy to buy at, which means the price reflects the dealer's appetite and inventory as well as broader supply and demand.
Prices can move sharply if several dealers withdraw at once. The bid also carries information.
A bid that keeps rising towards the ask suggests buyers are more eager than sellers, and a bid that falls away in a hurry is often the first visible sign of stress in an asset. Watching the bid side is a standard part of judging whether a market is functioning normally.
In practice
Real-world examples.
Example
A family office selling a $3,000,000 holding in a small listed engineering firm finds the best bid covers only 2,000 shares. The order is broken into daily slices over two weeks to avoid pushing the bid down and losing several percent of the value.
Example
A fund administrator calculating a daily net asset value uses bid prices for the fund's holdings rather than mid prices, producing a figure roughly 0.2% lower and reflecting what the portfolio would genuinely fetch.
Example
A corporate treasurer selling surplus euros for dollars is quoted a bid of 1.0850 by one bank and 1.0846 by another. On a 4,000,000 euro sale the better bid is worth $1,600 more, so the treasurer routes the trade to the first bank.
Think of it
“Bid is what buyers will pay-the price at which you can sell.
Formula
Calculation
Proceeds from an immediate sale = Number of units x Bid price, less any commission
An investor holds 10,000 shares in a listed logistics company quoted at a bid of $24.80 and an ask of $24.90. Selling the whole position at the bid produces 10,000 x $24.80 = $248,000, and after a flat $50 dealing commission the net proceeds are $248,000 - $50 = $247,950.
A valuation report using the midpoint of $24.85 would have shown the holding at 10,000 x $24.85 = $248,500. The difference of $248,500 - $248,000 = $500 is the half-spread the investor gives up simply for choosing to sell now rather than waiting for a buyer at a better price.Case study
Seen in the real world.
This is an illustrative and clearly fictional story. Larkfield Capital, an invented boutique investment manager, marketed a fund holding smaller listed companies and valued the portfolio each month at the midpoint of the quoted spread. Investors saw steady monthly figures and the fund grew quickly.
When a large investor asked to withdraw $8,000,000 at short notice, Larkfield discovered that selling into thin bids moved several holdings down by 3% to 6%. The cash raised was materially below the reported valuation, and the shortfall was effectively borne by the investors who stayed.
The fictional firm changed its policy to value less liquid holdings at bid rather than mid, and introduced a notice period on large withdrawals. Reported returns fell slightly, but the valuations finally matched what the portfolio could actually be sold for.
Watch out
Common mistakes.
- Assuming the price shown on a financial news site is the price you can sell at, when it is usually the last trade rather than the current bid.
- Valuing an illiquid holding at the quoted bid without checking how many units that bid actually covers.
- Mixing up bid and ask when calculating expected proceeds, which quietly overstates the cash a sale will raise.
Questions
People also ask.
Is the bid price always lower than the ask price?
Yes, in a functioning market the bid sits below the ask; if they crossed, the orders would simply trade against each other.
Who sets the bid price?
In an order-driven market it is set by whichever buyer has posted the highest limit order, while in a dealer market a market maker quotes it using its own capital.
Does the bid price matter if I am buying rather than selling?
Indirectly, since a wide gap between bid and ask tells you how much value you would lose if you had to reverse the trade quickly.
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