Bid and ask meaning in forex
There are different types of securities that can be traded in a financial marketplace. In the case of the forex market, the currencies of different countries and the forex rates are the securities that are traded in the market. In financial markets, especially the forex market, most buyers and sellers like businesses and investors will not interact with each other directly. Instead, the trades in securities like forex will be routed through intermediaries like traders and dealers who will purchase and sell the security on behalf of their client.
Since the traders and dealers are taking a risk in purchasing and selling the forex, there is likely to be a difference in the value of prices at which the security will be purchased and sold. Typically a forex trader will offer a lower price for a currency if he is purchasing it and sell it at a higher price to the currency buyers to compensate for the risk he is taking when investing his money in the currency at a particular time. Hence those who are dealing in forex should be aware of the bid and ask meaning in forex since these terms are used frequently by those selling and buying forex.
The bid price in forex is the maximum exchange rate which a forex trader is willing to pay for the currency pair. The forex buyer will always be interested in paying the lowest price for the currency he wishes to purchase and will specify the lowest bid price. This bid price will be considered by forex traders, who wish to sell the specified currency. However, the currency will only be purchased when the currency buyer is able to find a seller who is willing to match his bid price. If the buyer is unable to find a seller, matching his bid price, he may have to increase it.
Ask price is the lowest price that the forex dealer or trader is willing to sell the currency for. Often the forex dealer is acting on behalf of a business that is selling a particular currency which it has received as payment for a product or service sold. The dealer will usually look at the bid price of the currency to set the asking price. A deal will be finalized when the forex dealer finds a trader willing to pay the asking price. Though the dealer would want to maximize his profit, setting the asking price high as possible, he will find it difficult to find a buyer for currency, if the price is much higher than the market rate.
Here are below bid, ask price , spread example:
Understanding the bid, ask price
The bid and the ask price are important for those who wish to deal in forex since they provide an indication of the rates at which a transaction is likely to get finalized. The forex trader who wishes to purchase currency will find that he is paying a price which is higher than the current selling price of the currency since there are transaction costs involved for every trade. The information about the bid and ask prices provided by the various forex traders and dealers are used by the forex buyer or seller to choose the trader or dealer who is offering the best possible price.
The asking price, the bid price is an indication of the transaction cost which a person will incur if they purchase a currency and sell it immediately. The bid and ask price will also depend on the economy of the country, financial stability. In some countries, the inflation rates are high, and the currency value, is decreasing rapidly. In these cases, forex traders will find it difficult to find buyers for the currency of the country. Hence if they are investing in this currency, they will usually keep the asking price higher.
The difference between the bid and the asking price for a particular currency pair is called the forex spread or bid-ask spread. It is an indication of the market liquidity, how easy or difficult it is for a seller to find a buyer who is willing to pay the price he requires. When there is a lot of liquidity in the market, the spread will be low, and when there is less liquidity in the market, the spread will be higher. Typically when forex markets are open, the spread for major currency pairs like the USD/Euro will below. On weekends, major forex dealers are closed, reducing the liquidity in the market and the spread will also be higher.