Glossary

Bid Price/Ask Price

The term bid refers to the highest price a buyer will pay to buy a specified number of shares of a stock at any given time. The term ask refers to the lowest price at which a seller will sell the stock.

The bid price will almost always be lower than the ask or offer, price. The difference between the bid price and the ask price is called the spread.

Market Making

Order Book

Liquidity pool

Ask Price

Note

In traditional financial markets, the buy and sell orders that are placed on a specific market are called bids and asks.

While bids are offers in a base currency for a unit of the trading asset, asks are the selling prices set by those holding the asset and looking to sell. Therefore, the asking price is the minimum price that an individual would be willing to sell their asset, or the minimum amount that they want to receive in return for the unit they are parting with.

In an exchange’s order book, the highest bid price and the lowest asking price are the first to fill when a trader utilizes a market order, meaning that a selling market order will match the highest bid, and a buying market order the lowest asking price. The gap between the lowest asking price and the highest bid price is what is known as the spread of the market.

A liquid market tends to have a smaller spread because the buying and selling sides are made up of more orders (more people in the market that are willing to place an order into the order book). When setting a limit sell order, an individual can define a specific asking price, but if their price is not the lowest, it will not be the first one to be filled. It will simply add depth to the existing order book for this asset. In contrast, when using a market order, traders are not able to set the asking price manually, and their order will be executed instantly according to the best price available matching the highest bid of the order book

Bid Price

The bid price is the highest price that a particular buyer is willing to pay for a specific product or service. In the context of financial markets, it is the value buyers offer for an asset, such as a commodity, security, or cryptocurrency.

Note

A trading order book consists of multiple bid prices (on the side of buyers) and asking prices (on the side of sellers). The highest bid price is always lower than the lowest asking price and the difference between them is referred to as a bid-ask spread.

Traders or investors that are willing to sell their assets or stock positions need to either accept one of the bid prices available on the order book (ideally, the highest one) or to set an asking price and wait until a buyer eventually bids against that value, filling the order.

In financial markets, traders have the power to decide what price they are willing to buy or sell an asset and they do so at the moment they create their order. Clearly, if the price they set is too far apart from the current market price, their order won’t be filled.

In a situation where multiple buyers are competing for an asset and start putting their bids, one after the other, we would have what is sometimes referred to as a bidding war. When a bidding war occurs, buyers replace their bids higher and higher in order to cover the bids of other competing buyers and this would probably cause the market prices for that asset to increase rapidly.

Security

Property or goods that you promise to give to someone if you cannot pay what you owe them.

Market Order

A market order is an order to instantly buy or sell at the best available price. It is executed based on the limit orders that are already located in the order book, meaning that market orders depend on market liquidity to be completed.