Ask and bid

These two words are used very often in equities and commodities market. Ask and bid ensure liquidity in the markets.

Ask, as its evident, is what a seller demands or the minimum price at which a grower or maker of a produce or a dealer is willing to sell. Bid is the minimum price a buyer is prepared to pay.

In the normal course, a bid price tends to be lower than the ask price since it is not unusual for a seller to expect a higher price for his product. Again, a buyer usually tries to buy a product at a price as much as lower he/she can.

Ask and bid are important for a transaction in a market to go through. Trading takes place when the buyer and seller agree on a price for transaction.

The difference between the bid and ask price is known as the spread, which also indicates the liquidity in a commodity.

For example, if the ask price of commodity X is ₹10 and the bid price ₹8, the spread is ₹2.

If the spread is thin, then it leads to better liquidity in the market.

This also means that a produce in which demand and supply match will see a thin spread, whereas a mismatch in arrivals and offtake will see it more wide and illiquid.

On the other hand, when the demand is high and supply short, the spread will be high.

For example, currently oat prices in the global market are surging due to high demand and problems in reaching supplies to consumers.

On the other hand, when the supply is ample and demand weak the spread will be negative. Sugar prices in the domestic market can be a good example with supplies outstripping demand. Here, not only is the spread negative but the producer is also unable to recover production costs.

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