Bargaining is a common factor for buying, selling, shopping, or any transactional communications. It occurs when a buyer is not content with the amount charged by the seller or vice versa. Bargaining exists in the bond market as well, where the bid price and ask price form the two sides of the transaction.
Defining Bid Price
Bid and ask prices are like two-way quotations for transactions of securities like bonds.
- The bid price is the quote put forward by the buyer. It indicates the maximum amount the buyer is willing to pay for the bond.
- The asking price is the quote the seller has set for the particular bond unit(s). It indicates the minimum amount the seller is willing to sell the units at.
For Instance
RBI issues government securities through auctions where willing investors place their bids. The provisions for different auctions, like competitive and non-competitive bidding, can be different. That said, RBI sets a range, and investors bidding within the same range get the units. Here, the bid price of the investors must align with the asking price of the RBI.
In terms of trades in the secondary market, the primary bond holders present the asking price, and the new buyers convey the bid price.
Factors Determining the Bid and Ask Price
The bid and ask price depends on the following:
- Market Demand: The higher the demand for the bonds in the market, the more the seller can increase the asking price to maximise benefits. The buyer may also offer a higher bidding price to beat the competition.
- Buying and Selling Decisions: Emergency fund requirements, personal investment goals, risk mitigation of investment portfolios, and many other factors can convince buyers and sellers to proceed with certain transactions.
The Spread and What It Indicates
Suppose the asked price is INR 10,000 for a bond unit, and the bidding price is INR 8,000. The gap of (INR 10,000 – INR 8,000) INR 2,000 is referred to as spread. Actively traded bonds tend to have low spread, indicating high liquidity. On the other hand, a large spread highlights the illiquid nature of a bond. A narrow spread obviously makes transactions easier, whereas the selling and buying of a bond with a large spread will be more difficult and time-consuming.
Wrapping Up!
The bid and ask spread has a risk factor, and it depends on your standpoint. Either the buyers overpay, or the sellers miss out on profit. Significant knowledge about market conditions and the latest trends is required to take informed steps when dealing with bid and ask prices. The correct estimations can fetch ample profit, while incorrect presumptions can delay or shelf the trade.
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FAQs About What are the Bid Price and Ask Price?
1. How to read the bid and ask price?
The bid price is the maximum amount a buyer is prepared to pay, and the asking price is the minimum price the seller is ready to accept.
2. Who sets the bid and ask price?
The bidder or the buyer sets the bid price, and the seller sets the ask price. Various factors, including market fluctuations and personal financial objectives, help determine the prices.
3. What is the difference between bid and ask prices?
The difference between the bid and the asking price is called the spread. A low spread signifies high liquidity and vice versa.
