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Financial Literacy

What is Ask Price?

Every asset transaction has two sides: a buyer and a seller. Whether you’re selling stock or transacting real estate, there are always two forces at work to determine the final price. Buyers want to pay as little as possible; sellers want to gain as much as possible. If you’re the seller, you’re the party that sets the ask price: the lowest an owner is willing to sell an asset, such as stock.

It’s what starts the conversation: what attracts buyers and determines the bid. It will always be higher than the bid price, because no investor will willingly pay more than a seller is asking. 

When investing, you’ll encounter asks in every single market, usually part of a bid-ask spread. It’s important to understand what the price represents and how it influences the price of the asset. 

Learn the difference between ask price and bid price

Ask Price vs. Bid Price

As mentioned, it’s opposite the bid price in a transaction. A seller’s price is the lowest amount they’re willing to accept and if there’s no buyer at that price, no transaction occurs. As the highest price a buyer is willing to pay, bid price effectively sets the price floor for the asset. 

When transacting directly with each other—such as through real estate—buyers and sellers need to agree. That means lowering the seller price and raising the bid price until there’s a compromise. When trading through exchanges, market makers serve to bridge the gap between the two, which facilitates transactions. In either case, if you’re the seller, the goal of the transaction is to agree upon the highest possible price. 

Examples

Investors are likely more familiar with this than they realize. Yet, recognizing ask pricing in the context of different investment types takes an understanding of what, specifically, it means. Here are a few examples across different assets.

  • A stock may have an ask of $50.69 x 100, which represents 100 shares at $50.69/each
  • A property listed at $289,000 means the seller has set this as their desired sales price
  • Forex is contextualized within a currency pair, such as EUR/USD 1.1250/1.1251

What is the Bid-Ask Spread?

Every asset transaction happens according to the bid-ask spread: a real-time two-way price quote system. Sellers deliver an ask to the market and buyers counter with a bid. The distance between the two is the spread. Investors pay when they buy a security and receive the bid when they sell, with market makers profiting from the difference.

  • The smaller the spread, the more liquid the asset. It means buyers and sellers more readily agree on the price of a security. The lowest price sellers will accept approximates the highest price a buyer is willing to pay. 
  • The larger the spread, the riskier the asset is. It suggests that buyers and sellers do not agree on the asset’s value and are less likely to come to an agreement on price. As a result, the asset is less liquid.

Bid-ask spreads vary greatly among different investment vehicles. For example, a volatile small-cap growth stock might have a bid-ask spread that varies several dollars, while blue-chip mega-cap companies only vary a few cents. In forex, bid-ask spreads span just a pip or two, which is the smallest unit of price measurement.

For example, in November 2021 Plexus Corp. (NASDAQ: PLXS) had a bid-ask spread of $88.30 – $93.64. Meanwhile, Johnson & Johnson (NYSE: JNJ) had a bid-ask spread of $165.59 – $165.60. The companies have a market cap difference of roughly $430 billion.

Relationship to a Bear Market

When prices are too high, it can scare away investors. High prices tend to suggest that sellers value their securities heavily and have more confidence than potential buyers. As a result, prices level-out at their ceiling and begin to fall. To restore liquidity, sellers need to reduce their number, bringing it closer to buyer bids. 

Securities and markets tend to trend downward until there’s equilibrium between buyers and sellers. If this equilibrium is more than 20% off of highs, it represents a bear market. Generally, this only happens when sellers back down. In this way, markets remain self-regulating. 

One Side of a Two-Way Price Quote

If you’re selling an asset, you want the best price for it—so it only makes sense to ask for the best price. That’s exactly what investors do when they sell securities. In a marketplace where millions and millions of transactions happen daily, sellers set the pricing for every publicly traded asset. This attracts bidders, which keeps markets moving. It’s a self-sustaining, two-way, real-time quote system that encapsulates the free market. 

And this is a crucial process to finding your path to financial independence. To learn more, sign up for the Liberty Through Wealth e-letter below! You can build wealth in your life by making smart invesment decisions. And the experts at Liberty Through Wealth are here to provide daily updates that may help you on your investment journey!

The next time you’re evaluating a potential investment, look at the current bid-ask spread. The  pricing by sellers can tell a lot about what to expect from that asset and how to approach transacting it.


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