The Bid and Ask Price Explained

Lets explore the concepts of “bid” and “ask” prices further.

This lesson explains what bid and ask prices are and provides examples to help new traders understand their significance when entering and exiting trades.

Ready to dive in？ Lets go!

Imagine you‘re at a bustling farmers’ market, eyeing a basket of fresh strawberries.

You ask the vendor, “How much for these berries？” The vendor replies, “Five dollars.”

You ponder for a moment and say, “How about four dollars？” The vendor smiles and shakes his head, sticking to his price.

Congratulations, youve just experienced the essence of bid and ask prices!

In the trading world, the vendors price is the “ask,” and your counteroffer is the “bid.”

Just like in the farmers market, understanding these concepts can make you a savvy trader.

What is the bid and the ask？

Forex quotes consist of two sides, the bid, and the ask:

EUR/USD = 1.10252/1.10264

In the example above:

The bid price is 1.10252

The ask price is 1.10264

The Meaning of Bid and Ask

If you find these terms initially confusing, it helps to remember that the terms bid and ask are from the forex brokers perspective, not yours.

When you‘re buying, you’ll pay what the broker is asking.

When you‘re selling, you’ll need to accept what the broker is bidding.

From the broker‘s perspective, when you’re the potential buyer, the broker will ASK for a little more than what it might be willing to BID if you were selling.

In the price quote from earlier, since you‘re interested in buying EUR (the base currency), you’ll pay the ask, the brokers “asking price”, which is 1.10264

If you were selling, you‘ll pay the bid or“ accept the broker’s bid”, which is 1.10252.

To make it less confusing for traders, most forex brokers display “Sell” instead of “Bid” and “Buy” instead of “Ask” on their trading platforms.

The Spread

The difference between the bid and the ask is called the spread.

The spread is how the broker makes money.

No matter what markets you trade, whether forex, stocks, or crypto, you will always see a spread on the price.

Example of Bid and Ask Price

Imagine you buy and sell used iPhones. You are a used iPhone dealer.

A potential customer, Kim, messages you and wants to sell her iPhone.

You quote her a BID price. This is the price you want to buy her iPhone for.

After the iPhone is sold at the BID price, you now list the iPhone for sale on Facebook.

Another customer, Kanye, comes to you wanting to buy your iPhone.

This time, you quote the ASK price. The price you are asking to sell the iPhone.

In the scenario above, its obvious to see that in order to make a profit, your ASK price must be higher than your BID price.

The difference that you make in this transaction is the SPREAD.

This is the profit you make, as the iPhone dealer, from the transaction.

Lets now add some numbers to the example.

Kim wants to sell her iPhone. Your bid price is $1,000.

Kim sells the iPhone to you. She takes your bid price.

You immediately put this iPhone up for sale online and quote an asking price of $1,500

Kanye wants to buy the iPhone. He takes your ask price.

To summarize, you bought the iPhone for $1,000 and sold it for $1,500.

$1,000 was your bid price and $1,500 was your ask price.

The difference between these two is $500, which is the spread.

This is the spread that you make as a dealer.

Heres an example of a list of price quotes for an actual forex trading platform showing the bid and ask price for different currency pairs:

Heres an example of a bid and ask price shown for a specific currency pair.

When you place a trade with a retail forex broker, you are whats called a “price taker”.

You are not buying and selling from other traders as you would on a stock or crypto exchange.

You are buying from or selling to a dealer.

The dealer makes a profit by adding a spread, or markup to their quote.

Your forex broker operates very similarly to the iPhone dealer from the example above.

This is why forex brokers arent actually “brokers”. They are dealers, a topic covered in our lessons on choosing a forex broker.

For now, just know that whenever you “hit the bid” (sell at the bid price) or “lift the offer”(buy at the ask price), you pay the spread to your forex broker.