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FX106, On this video share with you what is a BID, ASK, SPREADS AND PIPS when it comes to Forex trading. Subscribe, Like 👍, enjoy the video and let me know on the comment section if you have any questions 😊
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What Is a Bid-Ask Spread?
A bid-ask spread is the amount by which the ask price exceeds the bid price for an asset in the market. The bid-ask spread is essentially 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.
An individual looking to sell will receive the bid price while one looking to buy will pay the ask price.
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.
The bid represents demand and the ask represents supply for an asset.
The bid-ask spread is the de facto measure of market liquidity.
Understanding Bid-Ask Spreads
A securities price is the market’s perception of its value at any given point in time and is unique. To understand why there is a “bid” and an “ask,” one must factor in the two major players in any market transaction, namely the price taker (trader) and the market maker (counterparty).
Market makers, many of which may be employed by brokerages, offer to sell securities at a given price (the ask price) and will also bid to purchase securities at a given price (the bid price). When an investor initiates a trade they will accept one of these two prices depending on whether they wish to buy the security (ask price) or sell the security (bid price).
The difference between these two, the spread, is the principal transaction cost of trading (outside commissions), and it is collected by the market maker through the natural flow of processing orders at the bid and ask prices. This is what financial brokerages mean when they state that their revenues are derived from traders “crossing the spread.”
The bid-ask spread can be considered a measure of the supply and demand for a particular asset. Because the bid can be said to represent demand and the ask to represent the supply for an asset, it would be true that when these two prices expand further apart the price action reflects a change in supply and demand.
The depth of the “bids” and the “asks” can have a significant impact on the bid-ask spread. The spread may widen significantly if fewer participants place limit orders to buy a security (thus generating fewer bid prices) or if fewer sellers place limit orders to sell. As such, it’s critical to keep the bid-ask spread in mind when placing a buy limit order to ensure it executes successfully.
Market makers and professional traders who recognize imminent risk in the markets may also widen the difference between the best bid and the best ask they are willing to offer at a given moment. If all market makers do this on a given security, then the quoted bid-ask spread will reflect a larger than usual size. Some high-frequency traders and market makers attempt to make money by exploiting changes in the bid-ask spread.
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The information contained here and the resources available for download through this website is not intended as, and shall not be understood or construed as, financial advice. I am not an attorney, accountant or financial advisor, nor am I holding myself out to be, and the information contained on this Website is not a substitute for financial advice from a professional who is aware of the facts and circumstances of your individual situation.
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