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Prefer watching? This video covers the key concepts from this article.
Understanding the Bid-Ask Spread
The bid-ask spread is the difference between the highest price buyers will pay (bid) and the lowest price sellers will accept (ask).
What is the Bid Price?
- The highest price buyers will pay
- What you receive when selling
- Represents current demand
What is the Ask Price?
- The lowest price sellers will accept
- What you pay when buying
- Also called the offer price
The Spread Explained
If bid is $50.00 and ask is $50.05, the spread is 5 cents. You'd lose 5 cents immediately if you bought and sold right away.
Why Spreads Exist
- Market makers profit from spreads
- Compensation for providing liquidity
- Wider when risk/uncertainty is high
- Narrows as trading volume increases
Impact on Your Trades
- Large spreads eat into returns
- Check spread before trading
- Use limit orders to control costs
- Avoid very thinly traded stocks
Managing Spread Costs
- Trade high-volume stocks
- Use limit orders instead of market
- Avoid trading right at market open
- Check Level 2 quotes for depth