What is an Offer and why is understanding Bid Offer essential for traders

First Encounter with Bid Offer

Retail investors like Somsak often encounter confusing situations. When he decides to buy shares of security A, the display shows a price of $173, but when purchasing 10 shares, the total cost comes out to $1,731 instead of $1,730. This happens because offer is the lowest price a seller is willing to accept, which in this case is $173.10. This small difference is called the spread and is very important in transactions.

What is Bid Offer? Understanding the Basics

In financial markets, Bid refers to the buying price, which is the highest amount a buyer is willing to pay for a security or stock. Offer or asking price is the lowest amount a seller is willing to accept. These two prices are not fixed; they change every second based on supply and demand in the market.

A key characteristic of Bid Offer is that the Bid price is always lower than the Offer price because buyers try to pay as little as possible, while sellers want to receive as much as possible.

Price Movements of Bid Offer Based on Supply and Demand

When market demand exceeds available supply, both Bid and Offer prices tend to rise. This is a bullish market signal, with investors willing to pay higher prices because they are confident the stock will go up further. Conversely, when supply exceeds demand, both prices decrease. This is a bearish market, with sellers rushing to unload securities while buyers hesitate.

How to Read Bid Offer: The Market’s True Indicator

Observing changes in Bid Offer provides deep insights:

Narrow Bid, Narrow Offer: Indicates an existing trend but low trading volume. If trading continues steadily, watch closely because increasing volume may signal the trend will continue.

Narrow Bid, Wide Offer: Large investors may be preparing; they want to see who will step up before withdrawing their Offer and pushing prices higher. This is a period to pay attention.

Wide Bid, Narrow Offer: Usually occurs at the end of a trend; prices start to stabilize. Avoid entering during this phase.

Wide Bid, Wide Offer: Highest trading volume. If this occurs at the breakout point of the Offer, prices may surge. Avoid at the end of a trend.

Benefits of Bid Offer in Actual Trading

Understanding Bid Offer has several advantages:

First, it helps execute regular orders (Market Order) close to Bid Offer prices. Some experts may predict this, but no one guarantees exact prices.

Second, it forms the basis for Limit Orders and Stop Loss orders. Skilled traders use this information to set profit/loss targets.

Third, the difference between Bid and Offer (spread) indicates the liquidity of the security. Narrow spreads = high liquidity = easy entry and exit. Wide spreads = lower profitability potential.

Advantages of Using Bid Offer

From the seller’s perspective: The Bid price indicates how much the market is willing to pay for the security they hold. If today’s Bid rises, it shows market appreciation for that stock.

From the buyer’s perspective: The Offer price clearly states how much they need to pay to acquire the asset immediately.

In a Bull Market: Buyers’ Bids keep rising because they believe the stock will go up, with good Offer prices and many bidders. Confidence in selling increases.

In a Bear Market: Sellers rush to unload; if buyers keep setting low prices, sellers are willing to accept. Finding matching buyers becomes easier.

Limitations of Bid Offer

Bid Issue: Bid prices are always lower than Offers. Sometimes this becomes a barrier to actual transactions because sellers may be unwilling to sell at the Bid price offered by the market. Also, Bid prices do not always reflect the true value of the security, as market perceptions change based on investor sentiment, not necessarily fair value.

Offer Issue: Offer prices are often higher than the current market price. Buyers must pay more, adding extra cost. New investors often are unaware of this. When they place Market Orders, the transaction ends at the Offer price, putting them at a disadvantage.

System Issue: In modern electronic systems, millions of transactions occur daily. Buyers and sellers cannot contact each other directly, making price negotiation impossible.

Comparison Table: Bid vs. Offer

Spread: The Love of Difference

(Spread) is the difference between Bid and Offer. This number is controlled by intermediaries, such as brokers. Narrow spreads = highly searched securities; large-cap stocks often have nearly zero spread. Wide spreads = less searched securities; micro caps or small bonds may have spreads of several percent.

Traders must consider spreads because large spreads mean prices need to rise significantly before profit is possible. Imagine a stock priced at 100 Baht with a spread of 5 Baht (Bid 97.5 Offer 102.5). You need the stock to rise to at least 105 Baht to make a profit.

How Do Bid and Offer Prices Change?

Both Bid and Offer change every second based on market trading. They are not fixed numbers but reflect overall market sentiment.

In a Bull Market: Buyers’ Bids keep coming in, pushing Bid prices up along with Offers. The spread may narrow as market consensus grows that stocks will rise.

In a Bear Market: Sellers keep releasing, causing both prices to fall. The spread may widen due to uncertainty.

When New Information Emerges: Good news causes Bid prices to explode, with Offers lagging behind. Bad news prompts sellers to rush out, and Bids decrease continuously.

Case Study: Using Bid Offer in Decision Making

Somsak wants to buy security A. The current Bid is 172 Baht, and the Offer is 173 Baht. Spread = 1 Baht.

If Somsak places a Market Order to buy, he will get at the Offer price of 173 Baht.

If he places a Limit Order at 172.50 Baht (Between Bid and Offer), there’s a chance to get filled, or he can wait for the Bid to rise to his target by monitoring Bid and Offer changes.

Some investors use Bid Offer as an indicator of market interest. If the Offer widens, it shows many want to sell. If the Bid narrows, it indicates sellers are fleeing.

Summary: Bid Offer is the Market’s Language

Understanding Bid Offer is not just about knowing the terms but about learning the language the market uses to communicate. Highly liquid securities, like Mega Cap stocks, have narrow Bid Offer spreads, making entry and exit easier. Less searched securities have wider spreads, requiring more careful consideration before investing.

Stock market investing is a proven way to generate income. Returns can help achieve financial goals, both short-term and long-term. However, it requires time, study, and practice to become proficient.

Bid Offer is a tool. The better you understand it, the better your trading decisions. Observing how Bid Offer changes minute by minute is like practicing reading the “mood” of the market.