What is the difference between bid and offer?

Terms Bid and offer (offer also called as ASK) is a two-way price which indicates best price at which securities can be bought and sold at point of time. Bid price is the minimum price whereas offer price or Ask price is minimum price where securities can be bought and sold. Difference between bid price and ask price gives the price called spread. Spread and liquidity are inversely proportional that means if spread is smaller then liquidity will be greater for a given security

For example,

Market maker quoting a price of $13.50/$13.75 for XYZ company stock. Mr. x Ask for $13.50 (Bid price) and sell at $13.75 (Ask price)

Spread = ask price – bid price => 13.75-13.50 => $0.25

In the above case market maker makes profit of $0.25

Market makers will take advantages of bid price and ask price. Depending on market and security these Bid, Ask and spread prices may vary. If there is ample of liquidity in security then bid price and ask price are close. This situation is called as narrow bid ask spread. These situations helpful to investors, as it makes easier for investors to entry and exist in case of large positions. If ask and bid prices are far and there is a wide bid ask spread then these securities are expensive and time taking

Price of bid and ask prices are determined based on market. These are set by people and institutions who invested in particular securities. Bid price and ask price will shift upwards if demand outstrips supply. Bid price and ask price will shift downwards if supply outstrips demand. Spread price is determined by overall level trading security activity. Higher the activity narrow the bid ask price, similarly lower the activity wider the bid ask price.

The major differences between a bid and an offer are as follows −