Bid & Ask

1. Definition

The Bid and Ask prices represent the best potential prices at which securities can be sold and bought at a given point in time.

1. Bid Price: The highest price a buyer is willing to pay. ("The Floor")
2. Ask Price (Offer): The lowest price a seller is willing to accept. ("The Ceiling")

2. Execution Perspective (Crucial)

To execute a trade immediately (Market Order): * Buyers pay the Ask Price. (You must cross the spread to buy from a seller). * Sellers receive the Bid Price. (You must cross the spread to sell to a waiting buyer).

3. The Bid-Ask Spread

The numerical difference between the Ask and the Bid. $$Spread = Ask - Bid$$ * It represents the cost of liquidity. * Tight Spread: Indicates high liquidity (easy to enter/exit). * Wide Spread: Indicates low liquidity. You pay a higher premium to enter and receive less when exiting.

4. Market Makers

In option markets, Market Makers profit from this spread. They buy from you at the Bid and sell to you at the Ask, pocketing the difference as compensation for providing liquidity.