Bid, ask, spread and liquidity

In simple terms

Every stock quote shows two prices besides the last traded price.

• Bid: the highest price any buyer is offering right now. If you want to sell immediately, this is roughly what you will get.
• Ask (also called the offer): the lowest price any seller is accepting right now. If you want to buy immediately, this is roughly what you will pay.

The ask is always higher than the bid. If it were not, the buyer and seller would simply trade. The gap between them is the spread.

Some sources divide by the bid or by the mid-price instead of the ask. For narrow spreads the difference is tiny; what matters is using the same method when you compare shares.

The spread is a cost

If you buy at the ask and immediately sell at the bid, you lose the spread, even if the "price" has not moved at all. Every round trip, a buy followed by a sell, pays the spread on top of brokerage and charges.

Liquidity

Liquidity describes how easily you can buy or sell a meaningful quantity of a share quickly, without moving its price much. It shows up in three places.

• The spread. Liquid shares have narrow spreads, often a few paise on large companies.
• Market depth. The order book shows how many shares are waiting at each price. A deep book has large quantities near the best bid and ask, so a sizeable order fills without walking far up or down the book.
• Volume. The number of shares traded in a day. Heavily traded shares are usually liquid; shares that trade a few hundred times a day are not.

Large companies included in major indices are usually highly liquid. Small companies, and especially very small ones, can be extremely illiquid.

Why it matters

Liquidity is the difference between being able to sell when you want and being stuck. In an illiquid share, a sell order might find buyers only far below the last price, or none at all. That is when people discover a holding that looked like it was worth ₹2 lakh on the app is worth much less in practice.

Illiquid shares are also easy to push around. A few lakh rupees of buying can make the price jump, which is why small, thinly traded companies are the usual vehicles for pump-and-dump schemes. The rising price attracts buyers, the promoters of the scheme sell, and the buyers find there is nobody left to sell to.

Limitations

The bid, ask and depth you see are a snapshot. They change constantly, and large orders can be split into small pieces or hidden, so the visible order book does not always show all the interest in a share. Liquidity also changes over time: a share can be liquid on a normal day and very illiquid during a market panic, exactly when people most want to sell.

Common mistakes

• Looking only at the last traded price. The bid and ask tell you what you can actually trade at now.
• Ignoring the spread in small companies. A 3% or 4% spread is a large cost, paid every time you go in and out.
• Placing market orders in illiquid shares. The order can sweep through the book and fill at a very poor average price.
• Assuming you can always sell. In thinly traded shares, buyers can disappear, especially after bad news.

Try it yourself

Open the quote for a large company in the Nifty 50 and for a very small listed company, at the same time of day.

1. Note the best bid and ask for each and calculate the spread as a percentage.
2. Note the quantity available at the best bid and ask.
3. Note the day's traded volume so far.

Write one sentence comparing how easily you could sell ₹1 lakh of each.