Last Updated on Aug 25, 2022 by Aradhana Gotur Show An offer price is an asking price or the price at which a seller is willing to sell the securities or other assets. Simply put, it is the price at which you can buy the underlying asset from a broker or a market maker. This term is very often confused with the opening price of a stock. Let’s look at what the offer price is, and delve into its relevance for investors. What is an offer price?An offer price is a price at which a commodity, product, or service is offered for sale. In the world of investments and the stock markets, offer price refers to the per-share price at which investors purchase securities. The offer price in the share market is also known as the ‘ask price.’ Investors buy assets from a broker or the market at the offer price. This price is generally the seller’s lowest price to sell a particular stock to the buyer. In other words, the offer price is the lowest price that the seller is willing to accept when selling stock to the buyer. Offer price changes dynamically during intra-day trade with frequent trade moves. Offer price in an IPOThe offer price in an initial public offering (IPO) gains a lot of significance because an IPO is the debut of the company in the markets. The offer price determines how much money the company will be able to raise through an IPO. Generally, IPO offer price is set in a way where it is high enough to raise the required capital and low enough to attract the buyer’s interest in the company’s IPO. This is also the risk they face that should the offer price be too low or too high, the IPO may not succeed. This is why, in an IPO, the offer price is arrived at by the underwriters or book-runners, generally, investment banks, that participate in the offering. The current performance of a company, its market value, competitors, risk, growth prospects, and several other factors severely affect the value of offer price. Offer price vs. bid priceBid price is the maximum price a buyer is willing to pay the seller to buy a stock. The offer price is the lowest price a seller will accept when selling stocks to a potential buyer. When selling a stock in the market, the trading price (buyer’s price) will be lower than the offering price (seller’s price expectation). However, the trading price will be higher than the offer price when buying the stock in the market. It is important to note that the bid price and the offer price are directly affected by demand/supply. When the demand for a particular stock is high, the bidding price will naturally increase and be on the upper end of the spectrum since multiple people are demanding the same asset. Whereas, when the supply of a particular stock is high, the offer price would be on the lower end since the asset is in abundance in the market with too many sellers. The bid price and the offer price are directly affected by demand/supply. When the demand for a stock is high, the bidding price will naturally increase. Click To TweetOffer prices that are set by the underwriters cannot be changed. Bid prices, on the other hand, can be increased or decreased. While there is no limit or threshold for setting a bid price, there are certain limitations when setting an offer price as it is determined by a lot of factors, which, many a time, may remain outside the scope of company management. Offer price and opening priceThe opening price, which is often confused with the offer price, is the price at which the stock begins to trade in the stock market at every session. The offer price of a stock will remain unchanged by the stock’s opening price and can be high or low depending upon the interest of the investors. This also drives investor sentiment in the market. If the opening price of a share is higher than the offer price, the company’s stock will register a gain. Conversely, if the opening price of the company’s share is lower than the offer price, the stock will record a loss. During the IPO process, the underwriter (investment bank) sets the offer price of the company’s shares. If the demand for the particular shares is higher than the supply, the opening price will be higher. The opening price will be lower if the demand for the share is low. In a nutshell, the offer price is the lowest price at which a seller is willing to sell the stocks to the buyers. This is the minimum price a seller is willing to accept from the buyer. With the slew of IPOs luring investors and the markets showing potential for a breakout, it is imperative that investors know the basic terminology and understand its nuances before entering stock markets. Additionally, understand your risk appetite, do your research thoroughly or talk to your financial planner before making any investment decisions.
The difference refers to the bid-ask spread, and the narrower this spread, the more liquid the market for the concerned security/derivative. The bid-ask spreadThe asking price is the lowest price at which a prospective seller will sell the security. The bid price, on the other hand, is the highest price a prospective buyer is willing to pay for a security, and the bid-ask spread is the difference between them.read more depends on the demand and supply of the concerned security/derivative. You are free to use this image on your website, templates, etc, Please provide us with an attribution link Article Link to be HyperlinkedFor eg: Source: Bid vs Offer (wallstreetmojo.com) When you plan to acquire a good, there is a price that you are ready to pay for the good. Such a price is said to as a bid in normal parlance. The term “bid” is popularly used in the stock market quote and refers to the price the buyer of the stock/derivative is willing to pay for the same. Thus, the maximum price the buyer or a group of buyers are ready to pay for a particular security/derivative buys quantity, also known as bid quantity. Similarly, when you intend to sell a good, you would like to receive a minimum/lowest price from selling the good; such a price is referred to as offer/ask priceThe ask price is the lowest price of the stock at which the prospective seller of the stock is willing to sell the security he holds. In most of the exchanges, the lowest selling prices are quoted for the purpose of the trading. Along with the price, ask quote might stipulate the amount of security which is available for selling at the given stated price.read more in normal parlance. The term “offer price,” also known as the ask price, refers to the price that the seller of the stock/derivative prefers to receive for the same. Thus, the minimum/lowest price the seller or a group of sellers intends to receive for a particular security/derivative sell quantity is also known as the offer quantity. Both prices are necessary for a trade to execute and represent the demand and supply sides of the security/derivative they quote. Example of Bid and Offer PriceThe two-way price quote of TCS Ltd. on Nifty on 13.01.2019 at 10.40 a.m. is below. As we can see, the stock of TCS is a highly liquid large-cap stock and forms part of the Nifty index, and as such, the spread is quite narrow, which would not have been the case in thinly traded securities illiquid counters. Thus, if an investor intends to buy 1,000 shares at the immediate market rate, they can buy them at the current offer rate of ₹2071.9. Similarly, an investor who wants to sell the share immediately at the market rate can sell the same at the current bid rate of ₹2071.25. The bid-offer spread is the difference between bid and offer rates, i.e., ₹0.65 (₹2071.9-₹2071.25). One may note that the best bid rate and best offer rate are only used at any time to determine the bid-offer spread. You are free to use this image on your website, templates, etc, Please provide us with an attribution link Article Link to be HyperlinkedFor eg: Source: Bid vs Offer (wallstreetmojo.com) Key Differences
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ConclusionIt determines the demand and supply side of a security/derivative and the price at which both matches result in a trade. The bid and offer rates keep changing during market trading hours and do not remain constant. Although the terms find their usage more in financial markets, the rationale behind the two finds its relevance in any exchange of goods. The narrower the bid-offer spread, the more liquid the market is for security and vice versa. As a result, normally, small-cap stocks or thinly traded counters have a wide variation in their bid and offer quotes, whereas more liquid counters such as large-cap stocksLarge-cap stocks refer to stocks of large companies with value, also known as the market capitalization of 10 billion dollars or more, and these stocks are less risky than others and are stable. They also pay a good dividend and return, and it is the safest option to invest.read more and index constituents have a little variation in bid-offer quotes. Both are important in executing a trade, and investors must be well versed with these terms. These are not the prices the investor needs to conduct a business, but they act as an important yardstick through which the investor can decide the price they would like to bid/offer. Similarly, by seeing the bid-offer spread, investors can determine whether it is worth risk-taking to buy/sell such security/derivative. Recommended ArticlesThis article is a guide to Bid vs Offer. Here, we discuss the difference between bid and offer prices, infographics, and a comparison table. You may also look at the following articles: – |