Stock exchanges have three separate types of prices that are updated in real time when the markets are open: the bid, the ask, and the last prices. In this article, we are going to define the “ask price” term.
What Is Ask Price?
It is the price stated by the seller at which they agree to sell the asset. In stock exchange trading, there are typically many offers from different sellers at varying rates. The AP means the lowest rate that has a pending sell request. In other words, it is the best price at which anyone can buy tradable assets.
For over the counter stocks, the ask rate is the best-quoted price at which the seller is willing to sell a stock. For mutual funds, the ask rate is the net asset value + any sales charges.
The seller can qualify the ask rate either as firm or negotiable. Firm means that the rate is fixed and will not change whereas negotiable implies that at the moment of contacting the seller the rate can change. For example, it can depend on the order volume or the time when the contract is entered into.
Ask Price: How It Works
When an investor decides that they would like to sell an asset that they own, they do not have to offer it at the market price. Instead, they can use a "limit order" and inform their broker that they want to sell the asset as long as it is above a specific rate.
For example, the investor owns the shares of Company A but now are interested in selling them. Recently, the shares of Company A have been trading between $15 and $20 during the day, but the investor would prefer not to sell at less than $19. As a result, the broker will execute the trade only at $19 or greater.
Ask vs Bid Price
The “ask price” term is often used as opposed to the “bid price” term. The mathematical difference between the two is called a spread. The bid-ask spread reflects the supply and demand for a specific asset.
The AP differs from the BP in the following ways:
The AP is the minimum price the seller is ready to accept whereas the BP is the maximum price that the buyer is ready to pay for the asset.
The AP is typically lower than the current price whereas the BP is higher.
Buyers use the AP whereas sellers use the BP, and the AP is always higher than the BP.
But these two rates also have common features, such as:
Both prices are specific for a certain point in time and keep changing on a real-time basis. In a stock market, the two rates change every second depending on the current demand and supply.
Both rates are relevant only when someone wants to buy or sell something. They help to identify the demand for an asset and the value of the stock for a specific time period.
Both the ask and bid price help to define the asset’s liquidity risk.
Together with the bid price and the last price, the ask price is one of the three key rates used on the stock market. It is the lowest rate that the stock seller is ready to accept for a share of that stock. The AP can be either firm (fixed) or negotiable (can change depending on various factors). The AP is used by the sellers whereas the BP is used by the buyers.