The Bid-Ask Spread; What you need to know about each to have a better understanding when executing your orders.
In simple terms, the bid price indicates at what price “people” are willing to buy at, the ask at which price “people” are willing to sell at. People can refer to your broker, in the instance of a dealing desk, or institutions, banks, traders etc. – if your order goes directly to market, such as an ECN account. Price moves as bid and ask pending orders get filled.
The bid or buy price indicates the highest price the market is willing to buy a given asset at. The bid price is also used to populate/draw price movement on charts. Once a seller executes a market order it will fully or partially fill the pending bid at the given price point. If the latter is true price will not move until the order is completely filled and removed from the books. If you execute a sell order you will enter on the bid price.
The ask or sell price indicates the lowest price the market is willing to sell a given asset at. The ask price is not always visible by default on popular charting software but can be enabled within the settings. Once a buyer executes a market order it will fully or partially fill the pending ask at the given price point. If not completely filled, the ask price will not move to the next available lowest selling price. If you execute a buy order you will enter on the ask price.
The spread is the difference between the bid and ask price. Low or tight spreads can indicate high liquidity, wheres high or wide spreads can indicate low liquidity. Traders always seek the lowest spread possible. Some brokers offer fixed spreads. This might be appealing to many first time traders.
Now that you know what the bid-ask and spread is you can confidently identify each and keep an eye on your spread.