Ask: a complete guide on ask in trading

Imagine walking into a bustling market with vendors shouting out their prices for various goods. As a savvy shopper, you know that the price you see isn't always the price you have to pay. The same is true in trading, where prices for financial assets are constantly fluctuating, and the price you see on the screen isn't necessarily the price you can buy or sell an asset for. That's where the concept of "ask" comes into play. So what is it really?

What is ask?

In trading, ask refers to the lowest price at which a seller is willing to sell a particular financial instrument, such as a stock, commodity, or currency pair. It is also known as the "offer" price.

The ask price is the opposite of the "bid" price, which represents the highest price at which a buyer is willing to purchase the same financial instrument. The difference between the two is known as the "bid-ask spread," and it is a key metric in determining the liquidity and volatility of a particular market.

When a trader wants to purchase a financial instrument, they will typically place an order at or above the ask price. If a seller agrees to sell at that price, the trade will be executed, and the buyer will become the new owner of the asset. Similarly, when a trader wants to sell a financial instrument, they will typically place an order at or below the bid price, and if a buyer agrees to buy at that price, the trade will be carried out.

An example in Skilling’s trading platform

One example of using the "ask" feature on the Skilling platform would be when a trader is looking to buy a specific financial instrument, such as a stock or a currency pair. The "ask" price represents the lowest price at which a seller is willing to sell the financial instrument. By clicking on the ask price, a trader can place an order to buy the asset at that specific price.

For instance, let's say a trader is interested in Apple Inc CFD trading on Skilling's platform. The current market price of Apple's stock is $170 per share, but the "ask" price on Skilling's platform is $171. The trader can choose to place a buy order at the "ask" price of $171, which means they are willing to pay that price to trade the shares and thus the trade will be executed.

Other trading terms a beginner should know:

1. Bid (Difference between a bid price and an ask price): When engaging in CFD trading, the bid price and ask price are crucial elements to consider. These prices reflect the supply and demand dynamics for a particular asset. The bid price represents the highest price at which a buyer is willing to purchase a security, while the ask price represents the lowest price at which a seller is willing to sell it. The difference between the bid price and the ask price is referred to as the bid-ask spread. This spread is an important factor in determining market liquidity, as it indicates the level of trading activity and the ease with which an asset can be bought or sold. For instance, let's imagine you wish to trade shares of ABC Company through CFDs. On your trading platform, you observe that the current bid price is $50, and the ask price is $51. This means that if you want to execute the trade immediately, you would need to pay the ask price of $51. However, if you are willing to wait, you can place a bid at a lower price, such as $50.50. If a seller agrees to sell at that price, your order will be executed. Similarly, if you intend to sell your shares of XYZ Company, and the bid price is $20, while the ask price is $21, you can place a sell order at a higher price, say $20.50. If a buyer agrees to purchase at that price, your order will be executed.
2. Spreads: As earlier stated, the spread is the difference between the bid price (the highest price a buyer is willing to pay) and the ask price (the lowest price a seller is willing to accept) of a particular asset. This difference in price is also known as the bid-ask spread. The spread is an important concept in trading because it directly affects the cost of buying or selling an asset. When the spread is narrow, it means that there is a high level of liquidity in the market, and buyers and sellers are in agreement about the value of the asset. In contrast, when the spread is wide, it means that there is a low level of liquidity, and buyers and sellers have different opinions about the value of the asset. For example, let's say you want to buy shares of company ABC, and the bid price is $50, while the ask price is $51. The spread in this case is $1, which represents the cost you would incur if you wanted to buy the shares immediately. If the spread were wider, say $2 or $3, it would mean that the market is less liquid, and it might be more difficult to find a buyer or seller willing to trade at the desired price. It's important to note that the spread can vary depending on the asset being traded and market conditions. In highly liquid markets, such as major currency pairs, the spread can be as low as a few pips, while in less liquid markets, such as small-cap stocks or exotic currency pairs, the spread can be wider.
3. Liquidity: Liquidity refers to the ease with which you can buy or sell an asset at the price you want. The spread, which as we’ve seen is the difference between the buy and sell price of an asset, is a measure of liquidity. The smaller the spread, the higher the liquidity. A large spread can lead to losses when trading since it can be difficult to exit at a favorable price. However, large spreads are only a problem when there are few participants in the market. In a highly active market with many participants, the spread is usually small since buyers and sellers are continuously adjusting their prices to reflect the supply and demand. The level of liquidity in a market depends on the number of active participants. The more participants, the higher the liquidity, and the smaller the spread. For instance, Telefónica is a highly liquid stock in the Spanish market, but its liquidity is minimal compared to stocks such as Google or IBM in the US market. Similarly, the liquidity of US stocks is relatively low compared to the foreign exchange market (Forex). The foreign exchange market is the largest and most liquid market in the world, where huge sums of money change hands every day. As an example, the spread for the EUR/USD currency pair can be as small as half a pip, which is the fifth decimal place in the exchange rate. For instance, the buying rate for EUR/USD could be 1.23511 while the selling rate could be 1.23516.

Conclusion

In today's fast-paced financial markets, keeping track of the "ask" price can be challenging, but it is essential to stay informed. If you are new to trading, it is important to take the time to learn the basics, and if you are a seasoned trader, it is crucial to stay up to date with market trends.

FAQs

Q: What is the ask price in trading?

A: It is the lowest price at which a seller is willing to sell an asset, such as a stock, commodity, or currency.

Q: How is the ask price determined?

A: It is determined by the supply and demand for a particular asset. When there are more sellers than buyers in the market, the ask price tends to be lower. Conversely, when there are more buyers than sellers, it tends to be higher.

Q: Why is the ask price important for traders?

A: It is important for traders because it represents the cost of buying an asset. If a trader wants to buy an asset immediately, they will have to pay the ask price. Additionally, the ask price can give traders an indication of the overall market sentiment towards an asset.

Q: How does the bid-ask spread relate to the ask price?

A: The bid-ask spread is the difference between the highest price a buyer is willing to pay (bid price) and the lowest price a seller is willing to accept (ask price). The ask price is always higher than the bid price, and the difference between the two prices is the bid-ask spread.

Q: Can the ask price change over time?

A: Yes, it can change over time based on market conditions, supply and demand, and other factors. Traders should monitor the ask price and bid-ask spread for assets they are interested in trading to make informed trading decisions.

Q: How can traders reduce the impact of the ask price on their trades?

A: They can do so by using limit orders, which allow them to set a maximum price they are willing to pay for an asset. Additionally, trading in highly liquid markets with narrow bid-ask spreads can help reduce the impact of transaction costs on trades.