What do the terms ‘bid’ and ‘ask’ mean in trading?

Bid and ask - buy and sell

The terms are often used together in a term called a bid-ask spread. They are also fundamental concepts that one must learn in order to expand his or her essential trading skills. The bid and ask of a given instrument references a price quotation that goes both ways and indicates the optimal price to buy and sell it at any given time.

Bid

The bid price of a given instrument is representative of the highest price at which any buyer is willing to pay for an instrument at any given time. 

Ask (also known as the “Offer”)

The ask price of a given instrument is representative of the lowest price at which any seller is willing to sell an instrument for at any given time. 

Spread

If you take the difference between what the bid price is and what the ask price is, you end up with something called a bid-ask spread. This is an effective indicator of the liquidity of a given asset. In order to enter and exit a market, there is always the cost of the spread.

A good method to compare forex brokers is based on the spread of a given instrument. Generally, the smaller the spread, the better the broker. For a market-maker, the spread is what they are able to extract out as profit and they use the type of security and conditions of the market in order to determine the prices. Some bid-spreads may be very small whereas others will be large, all based on the current state of the market and the liquidity or lack thereof of the instrument.