A bid or bid price is the highest price a buyer is willing to pay for an asset.¹
Understanding Bid
In the context of stock trading, the bid price refers to the highest amount of money a prospective buyer is willing to spend for it.² Historically, auctions were conducted to determine the bid price. Now, an investor can place bid prices in an electronic trading platform. If a bid price coincides with the ask price offered by the seller, the trade is executed.
When the demand for an asset increases, this may lead to a bidding war, wherein two or more buyers place incrementally higher bids.
Example
Martha is selling her house for $1.4M because the housing market is hot.There are two buyers interested in purchasing Martha’s house. Buyer 1 makes an offer (Bid) of $1.45M, and Buyer 2 makes an offer (Bid) of $1.5M. This leads to a bidding war between the buyers, where ultimately Buyer 1 wins after increasing their bid to $1.55M. This bidding war benefitted Martha, as she went from only asking for $1.4M to receiving $1.55M.
Sources
1. Bid Price. Investor.gov.
2. Bid Price. Investopedia.
Please note that this article is for general informational purposes only. All examples are for illustrative purposes only. The views and opinions expressed are those of the author and do not reflect or represent the views and opinions of Alpaca. Alpaca does not recommend any specific securities or investment strategies.
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