Ask Rate

Ask Rate Definition – Ask Rate Meaning

The ask rate is the price at which the seller of an asset is willing to sell it. It can be fixed or negotiable.

Difference between Bid Rate & Ask Rate

The price at which the buyer wants to buy is called the Bid price and the price at which the seller wants to sell is called the ask price.

If you are a buyer you will buy at the ask price and if you are a seller you will get a bid price. 

The Ask Rate is generally higher as it is usually Negotiable. The buyers always tend to negotiate, that’s why the Ask Rate is higher than the bid price. 

What is a Spread?

The difference between the Ask Rate and the Bid price is called a Spread. Spread is the amount of profit that a broker makes by executing a trade.

Why is bid higher than the ask price?

Generally, the ask price is higher than the bid price. The reason for such an occurrence is that a market participant will not buy an asset (bid rate) for a higher quote than what they intend to sell the asset for (ask rate). Theoretically, ask price should exceed bid price.

However, in some situations, it is likely for the bid price to be higher than the ask price. For example, when an asset is under selling pressure, the ask price can be lower than the bid price due to a differential in volume. Investors want to offload their shares, regardless of the low price they will receive for it.

Why is ask higher than the stock price?

The market price of an asset changes by the minute in a live market situation. Therefore, the ask price being quoted may be higher than the traded market price. Many sellers in the market post limit orders with a target price and wish to sell the asset for a price higher than the traded market price.

What is Best Bids and Best Ask?

Best bids mean best buyers and best ask means best sellers.

Ask rate formula

The bid-ask spread percentage can be calculated in the following way:

Ask Price Example

For example, a penny stock is trading at INR 18.25/INR 18.50. The bid rate is INR 18.25 and the ask rate is INR 18.50. The spread is INR 0.25. Now, the spread percentage is calculated by dividing the spread by the ask rate, which is INR 0.25/INR 18.50 = 1.37%.

Now, the interpretation of the spread percentage is that it will cost an investor 1.37% as a spread cost if the buyer on the transaction if the investor were to acquire at INR 18.25 and sell the stock at bid rate of INR 18.50.

Remember, the spread differential is higher in the case of illiquid assets.

How to profit from bid-ask spread?

A market maker (a dealer or a broker) makes a profit out of the bid-ask spread differential. The market makers use the spread to make a profit, that is by quoting a higher ask than the bid. Given that the profit is not riskless, the spread is a compensation for the risk assumed by the market makers, such as solving liquidity problems by holding inventory.