What is a bid?
A bid is an offer from a buyer that states the price they are willing to pay for a specific quantity of an asset or service. Bids appear across many settings: financial markets (stocks, bonds, commodities, currencies), live and online auctions, and competitive contract tenders. When buyers submit bids and sellers accept or counter, trades and contracts are formed; this interaction is a central source of market liquidity.
Key definitions (first use)
– Bid: the price a buyer offers to pay.
– Ask (or offer): the price a seller wants to receive.
– Bid-ask spread: the difference between the ask and the bid.
– Pip: the smallest price increment used in many foreign exchange (FX) quotes.
– Market maker: a firm or trader that continuously provides both bid and ask prices to facilitate trading.
– Sealed bid: a bidding method where offers are submitted privately and opened later.
– Bid bond: a deposit provided by a contractor (or bidder) to guarantee that they will honor their bid if awarded a contract.
How bids work — basic mechanics
– In exchanges: Buyers (through brokers or electronic systems) post bids and sellers post asks. When a bid matches an ask, a trade executes. Market makers quote both sides to keep trading active.
– At auctions: Multiple buyers compete; the highest valid bid at the close wins the item.
– In procurement or construction: Companies submit bids in response to a request for proposals (RFP). Awarding follows the buyer’s rules (price, qualifications, timeline).
– Online marketplaces: Sites like eBay let bidders place offers until an auction ends or until a “Buy It Now” option is used.
The bid-ask spread — what it signals and how to calculate it
The spread measures the gap between what buyers will pay and what sellers will accept. Narrow spreads usually mean plentiful trading interest and easier execution. Wide spreads can indicate lower liquidity or disagreement about value.
Formulas
– Spread (dollars) = Ask price − Bid price
– Spread (%) = (Spread / Ask price) × 100
Worked numeric example (stocks)
– Bid = $55.00; Ask = $55.50
– Spread = $55.50 − $55.00 = $0.50
– Spread (%) = ($0.50 / $55.50) × 100 ≈ 0.90%
Worked numeric example (forex, pips)
– Quote for EUR/USD = 1.0859 (bid) / 1.0862 (ask)
– Spread = 1.0862 − 1.0859 = 0.0003 = 3 pips
– If you buy euros at 1.0862 and immediately sell at 1.0859, the difference equals 3 pips, which typically accrues to the broker or market maker.
Types of bids (short descriptions)
– Live/open auction bids: Public, competing offers during an auction event.
– Online auction bids: Virtual equivalent with the same competitive dynamics.
– Sealed bids: Private submissions opened together per predetermined rules; common in procurement.
– Market maker quotes: Continuous two-sided quotes to support liquidity; market makers capture spread as compensation.
– Automated bidding (advertising): Systems that automatically adjust bids to meet campaign goals (e.g., Google Ads automated bid strategies).
– Bid bond: A security submitted along with certain contract bids that guarantees the bidder will take the contract if selected.
Practical checklists
If you are bidding in financial markets (stocks, FX):
– Check current bid and ask prices and recent liquidity (volume).
– Decide order type: limit order (sets your maximum bid) versus market order (accept current ask).
– Factor in the spread and transaction costs before placing the trade.
– Use a reputable broker and confirm execution rules and fees.
If you are bidding in an auction (online or live):
– Read the auction terms (payment, fees, returns).
– Set a maximum price and stick to it.
– Consider proxy/automatic bidding (auto-increment up to your max).
– Verify seller reputation and item condition before bidding.
If you are bidding for a contract:
– Read the RFP/RFQ instructions carefully (deadlines, required bonds, documentation).
– Ensure capacity to fulfill the contract and include required bid bonds if requested.
– Price competitively but include realistic cost estimates and contingencies.
– Submit bids before the stated deadline and keep proof of delivery.
How to cancel or adjust bids (typical cases)
– Stock orders: A limit bid can often be canceled before execution via your broker or trading platform. Once executed, a trade cannot be “canceled”—it must be offset by another trade.
– Online auction (e.g., eBay): Cancellation rules vary; many platforms limit bid cancellation and allow it only in specific circumstances. Check the platform’s help center.
– Contract bids: Withdrawal rules depend on the tender documents; some allow withdrawal before the deadline, others do not.
Role of market makers
Market makers help keep a market functioning by continuously quoting both a bid and an ask. They earn the spread
— the difference between the bid and the ask — as compensation for holding inventory and bearing execution risk. That spread is a fundamental cost of trading and a core signal of market liquidity.
How the spread works (plain terms)
– Bid: the highest price someone is willing to pay to buy a security.
– Ask (or offer): the lowest price someone is willing to accept to sell.
– Spread = Ask − Bid. A narrow spread means buyers and sellers are close in price (higher liquidity). A wide spread means greater transaction cost and/or lower liquidity.
Key formulas (useful and exact)
– Spread (absolute) = Ask − Bid.
– Midprice = (Bid + Ask) / 2.
– Spread (percent of mid) = (Ask − Bid) / Mid × 100%.
– Half-spread = (Ask − Bid) / 2.
– Effective spread for a trade = 2 × |Trade price − Midprice|. (Measures the true round-trip cost relative to the prevailing midpoint at execution.)
Worked numeric example
– Suppose Bid = $10.00 and Ask = $10.05.
– Spread = $10.05 − $10.00 = $0.05.
– Midprice = ($10.00 + $10.05) / 2 = $10.025.
– Spread (percent of mid) = $0.05 / $10.025 ≈ 0.4988% ≈ 0.50%.
– If you place a market buy, you pay $10.05. If you immediately sell with a market sell, you receive $10.00 — a realized round‑trip cost of $0.05 (≈0.