Bid price and ask price: how your order actually gets filled

The bid price is the highest price a buyer is currently willing to pay for a share. The ask price (also called the offer) is the lowest price a seller is currently willing to accept. The gap between them is the spread. When you buy with a market order you pay the ask, when you sell you receive the bid, and the spread is a cost you pay on every round trip whether you notice it or not.

In the video, Vikas Panchal says this is one of those things people trade around every day without knowing what it is. He explains it with two examples, a currency quote and a second-hand mobile, and this lesson uses both.

What are bid and ask? The terminal example

Open any trading terminal and look at a quote. Vikas uses a currency pair, EUR/INR, as it appears on a broker's screen: two prices side by side, a bid and an ask, with a small gap between them, 20 paise in his example. The exact rate does not matter and changes every second. What matters is that there are always two prices, not one.

• The [bid price](/glossary/bid-price) is what buyers are offering. If you want to sell right now, this is what you get.
• The [ask price](/glossary/ask-price) is what sellers are asking. If you want to buy right now, this is what you pay.

The bid is always a little below the ask. If they ever met, a trade would happen instantly and the two prices would separate again.

One note on the currency example. For Indian residents, only INR-pair currency derivatives on Indian exchanges such as NSE, BSE and MCX-SX are legal. Overseas forex brokers and margin forex trading through LRS are not permitted by the RBI. Bid and ask work the same way in equities, commodities and legal currency contracts, so nothing in this lesson depends on forex.

The second-hand mobile example

Vikas's second example is the clearest. Suppose you own a phone worth Rs 10,000 and want to sell it. You go to a shop that deals in second-hand phones. The dealer says: I can give you Rs 8,000.

You accept and leave. Ten minutes later another customer walks in wanting the same model. The dealer says: Rs 10,000, and not a rupee less.

• Rs 8,000 is the dealer's bid: what he pays when buying from you.
• Rs 10,000 is his ask: what he charges when selling to someone else.
• The Rs 2,000 gap is his spread, and it is his income.

Vikas's summary line is worth remembering: in any bazaar, when you sell, your thing goes cheap; when you buy, it comes dear. "Bechoge to sasta jaayega, khareedoge to mehenga milega." The bid-ask spread is that rule written on a screen.

Who sets the bid and ask on an exchange?

In the mobile example the dealer sets both prices. In the video, Vikas describes it that way too: the gap is where the broker earns.

On an Indian stock exchange the picture is slightly different, and the difference matters. On NSE and BSE, your broker does not set the bid or ask and does not earn the spread. The exchange keeps an order book, a list of every buyer's limit order and every seller's limit order. The best bid is simply the highest buy order waiting; the best ask is the lowest sell order waiting. The people on the other side of your trade are other traders and market makers, and the spread is what they earn for standing ready. Your broker earns brokerage, which is a separate charge.

Where the dealer model does apply is in markets without a central order book, such as forex dealing and many overseas CFD platforms, where the broker is the counterparty and widens the spread as it likes. That is one more reason such platforms are best avoided, quite apart from the fact that they are not permitted for Indian residents.

What is the spread and why does it matter?

The spread is ask minus bid. It is the cost of getting in and out immediately.

Two things drive it:

• [Liquidity](/glossary/liquidity). In a heavily traded share like SBI or Reliance, thousands of orders sit on both sides and the spread is often 5 paise. In a thinly traded small company, the spread can be a rupee or more, which on a Rs 50 stock is 2 percent gone the moment you enter.
• Volatility. During big news or the first minutes after open, buyers and sellers pull back and spreads widen.

The spread is why "buy at 500, sell at 500" is not break-even. It is a loss of the spread plus brokerage. Over many trades the spread quietly becomes one of a trader's biggest costs. The lesson on leverage and spread shows how margin makes this worse.

Market order vs limit order

There are two ways to deal with the spread.

• A [market order](/glossary/market-order) says: fill me now at whatever the best price is. You buy at the ask or sell at the bid. Fast, almost certain to fill, and you pay the spread.
• A [limit order](/glossary/limit-order) says: fill me only at this price or better. You can place a buy order at the bid, or between bid and ask, and wait. You might get a better price. You might not get filled at all.

Beginners mostly use market orders because they are simple. In liquid stocks that is fine. In illiquid stocks a market order can fill at a price far worse than the one on screen, because your order eats through several levels of the book. This is called slippage, and it is where beginners get surprised.

A worked example: the spread in rupees

SBI on NSE shows bid Rs 500.00 and ask Rs 500.10.

• You place a market buy for 100 shares. You pay Rs 500.10 each: Rs 50,010.
• You change your mind and place a market sell immediately. You receive Rs 500.00 each: Rs 50,000.
• Loss: Rs 10 from the spread, plus brokerage and charges on two orders.

Now a small-cap stock showing bid Rs 48.00 and ask Rs 50.00.

• You buy 1,000 shares at market. If only 300 shares are on offer at Rs 50.00 and the next 700 are at Rs 51.00, you pay Rs 15,000 plus Rs 35,700: Rs 50,700 for shares the screen said were Rs 50,000.
• To sell immediately, you get the bid, Rs 48.00, or lower as your order eats the book: at most Rs 48,000.
• The round trip has cost you at least Rs 2,700, over 5 percent, before a single rupee of brokerage and before the price has moved.

Same Rs 50,000. One trade cost Rs 10 to enter and exit. The other cost Rs 2,700. That is the spread doing its work.

META's free course, Trading for Everybody, includes a session on reading market depth, which is the screen where you see the bid and ask levels behind these numbers.

Common mistakes

• Reading the "last traded price" as the price you will get. You get the bid or the ask, not the last trade.
• Using market orders in illiquid stocks and getting filled far from the screen price.
• Ignoring the spread when judging whether a trading strategy can work. A strategy that targets 20 paise in a stock with a 10 paise spread is giving up half its edge on entry.
• Trading in the first minute after open, when spreads are widest.
• Assuming the broker "took" the spread on an exchange trade. On NSE and BSE, the counterparty did; the broker charged brokerage separately.

Key takeaways

• Bid is what buyers pay; ask is what sellers want. You buy at the ask and sell at the bid.
• The spread, ask minus bid, is a real cost on every trade.
• On NSE and BSE the order book sets the spread, not your broker. On dealer platforms the broker sets it, which is one reason to avoid them.
• Liquid stocks have tight spreads; illiquid stocks and volatile moments have wide ones.
• Use limit orders when the spread is wide, and always check market depth before a large order.