Bid definition
What is the bid price?
The bid price is the price at which a trader can sell an underlying asset to a broker or market maker. From the perspective of the market maker, the bid price is the price at which they are willing to buy the underlying asset from the trader.
The bid price is one of the two prices quoted when trading financial assets, the other being the offer price. The difference between the bid price and the offer price is known as the spread, which is the cost that a trader will incur in order to open a position.
The bid price will always be slightly lower than the market price, while the offer price will always be slightly above it.
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Bid price examples
Let’s go through two examples of a bid price – one for shares and one for forex.
Suppose Apple stock is trading at $130.50 with an offer price of $130.60 and a bid price of $130.40. You think that the price will fall, so you open a CFD to short – or sell – five contracts at the bid price of $130.40. After a few days, the share price has fallen and it is now trading at $127.40, with a bid of $127.20 and an offer of $127.60.
In this scenario, your decision to go short will have yielded a profit and you could close your position. To do this, you would reverse your trade and buy five contracts at the current offer price of $127.60.
Now let’s look at forex and suppose that EUR/USD was currently trading at $1.2450, with an offer price of $1.2480 and a bid price of $1.2420. Given a recent interest rate announcement from the Federal Reserve (Fed), you decide to short this pair on the assumption that it will decrease in value.
As a result, you decide to open a CFD position to sell five contracts at $1.2420. After a few days, EUR/USD has fallen to $1.2220, with a bid price of $1.2190 and an offer price of $1.2250. You decide to close your position to take your profit by reversing your trade – meaning that you’d buy five EUR/USD contracts at $1.2250.
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