Bid-Ask Spread Explained: What It Is and Why It Matters for Your Trades

Every stock has two prices at any moment: the price at which you can sell immediately and the price at which you can buy immediately. The gap between them is the bid-ask spread.

The Definitions

• Bid: the highest price a buyer is currently willing to pay.
• Ask (or offer): the lowest price a seller is currently willing to accept.
• Spread: ask minus bid.

Example. A stock shows a bid of $49.98 and an ask of $50.02. Spread = $50.02 − $49.98 = $0.04. As a percentage of price: $0.04 ÷ $50.00 ≈ 0.08%.

If you place a market order to buy, you pay the ask ($50.02). If you place a market order to sell, you receive the bid ($49.98). The "last price" is simply where the most recent trade happened, which could be either.

The Spread Is a Cost

If you buy at the ask and immediately sell at the bid, you lose the spread, in this case $0.04 per share, even though nothing about the stock changed. That's the cost of crossing the spread, and it applies to every round trip.

For a liquid large-cap stock, the spread might be a penny, a negligible cost. For a thinly traded stock, it can be many percent of the price, which can easily exceed commissions or any expected gain.

Who Sets the Spread

Market makers (specialized trading firms) continuously quote both a bid and an ask and earn the spread as compensation for providing liquidity and taking on inventory risk. Competition between market makers narrows spreads for popular stocks.

What Makes Spreads Wider or Narrower

Narrower spreads:

• High trading volume and many participants.
• Large, widely followed companies.
• Low volatility.
• Regular trading hours, especially mid-day.

Wider spreads:

• Low volume, small-cap, or penny stocks.
• High volatility, around news or earnings.
• The open, the close, and especially pre-market and after-hours trading.
• Options with low open interest or far from the current price.
• Foreign stocks traded as ADRs when the home market is closed.

Spread as a Liquidity Gauge

The size of the spread, together with trading volume, tells you how liquid a stock is. Tight spreads mean you can trade quickly in size with little cost. Wide spreads mean each trade moves the price against you and that exiting a position can be expensive. Market capitalization is often a rough guide; see what is market cap.

How to Reduce the Cost

• Use limit orders rather than market orders, especially in stocks with wide spreads. A limit order lets you specify the price instead of accepting the ask. See stop vs. stop-limit vs. limit orders.
• Trade during regular hours, when spreads are usually tighter.
• Avoid trading right at the open or immediately after major news.
• Check the spread before placing an order, particularly for small or thinly traded stocks and options.
• Be cautious with very illiquid securities, where the spread may be larger than a realistic profit.

Spread vs. Commission

Many brokers advertise zero-commission trading. The spread is still there, and in some cases the way an order is routed can affect the price you receive. "Commission-free" does not mean "cost-free."

Spread and Slippage

Slippage is the difference between the price you expected and the price you actually got. Part of it can come from the spread, and part from price movement between when you place the order and when it fills. Wide spreads and fast markets both increase it.

What to Take Away

• Spread = ask − bid; it's a cost every time you trade.
• It's tiny for liquid large-cap stocks and large for thin ones.
• Limit orders and regular trading hours help control it.
• Check it before you trade, not after.

This article is for educational purposes only and is not investment advice.