What is the difference between a bid and ask price?

For every stock or options contract, there is an ask price, which is the lowest price a seller is asking for. There’s also a bid price, or the highest price a buyer is currently willing to pay. You’ll notice that the bid price is almost always lower than the ask price. This difference between the bid and ask price is called the bid/ask spread.

What is a bid ask spread?

A bid-ask spread is the difference between the highest price that a buyer is willing to pay for an asset and the lowest price that a seller is willing to accept. The spread is the transaction cost. Price takers buy at the ask price and sell at the bid price, but the market maker buys at the bid price and sells at the ask price.

How are bid and ask prices set?

Bid and ask prices are set by the market. In particular, they are set by the buying and selling decisions of the people and institutions investing in that security. If demand outstrips supply, then the bid and ask prices will gradually shift upwards. Conversely, if supply outstrips demand, bid and ask prices will drift downwards.