Bid and ask
Also known as: bid and offer, bid-ask spread
The bid is the highest price a buyer is willing to pay for a security, and the ask (or offer) is the lowest price a seller will accept. The difference between them is the bid-ask spread.
Every quoted security has two prices at any moment. The bid is the highest price buyers — typically dealers or market makers — are currently willing to pay. The ask, also called the offer, is the lowest price sellers are currently willing to accept. Together they form the quote, and the gap between them is the bid-ask spread.
From an investor's perspective, the sides work in reverse of what many beginners expect: you buy at the ask and sell at the bid. If a stock is quoted 20.00 bid, 20.05 ask, a customer buying pays $20.05 per share, while a customer selling receives $20.00. The $0.05 spread is kept by the market maker as compensation for standing ready to trade.
Spread width signals liquidity. Actively traded securities like large-cap stocks have penny-wide spreads because many participants compete on both sides. Thinly traded stocks and bonds carry wider spreads, which is a real (if hidden) cost of trading them. Dealers profit from the spread rather than charging a commission, which is why they're said to act in a principal capacity.
Bid and ask mechanics appear throughout the securities exams. The SIE, Series 7, and Series 65 all expect you to identify which side of the quote a customer trades on, calculate the spread, and connect spread width to liquidity — both for stocks in the secondary market and for government and corporate debt quotes.
Key takeaways
- The bid is the highest price a buyer will pay; the ask (offer) is the lowest price a seller will accept.
- Customers buy at the ask and sell at the bid — the less favorable side of each quote.
- The bid-ask spread is the market maker's compensation and shrinks as liquidity increases.
- Dealers trading from their own inventory earn the spread instead of a commission.