What is the bid-ask spread in trading?

Bid, ask and spread

• Bid: the highest price a buyer is offering at that moment. It’s what you get if you sell at market.
• Ask: the lowest price a seller is willing to accept. It’s what you pay if you buy at market.
• Spread: the difference between the two.

Example: a stock shows a bid of $25.40 and an ask of $25.43. The spread is $0.03. If you bought 500 shares at market and sold them right away, without the price moving, you’d lose 500 × 0.03 = $15 just for crossing the spread.

The midpoint between the bid and the ask ($25.415 in the example) is a useful reference: when you buy at market you pay half the spread above that point, and when you sell at market you receive half the spread below it.

Why the spread changes

The spread depends mainly on liquidity: how many buyers and sellers there are and how much they’re willing to trade. It widens when:

• The asset has low volume, like many small stocks.
• There’s news or a sharp move and participants pull their orders.
• You trade outside regular hours (pre-market and after-hours), when fewer people participate.

To compare assets, look at the spread as a percentage of the price. The $0.03 in the example equals 0.12% of $25.43. A stock with a bid of $4.10 and an ask of $4.20 has a $0.10 spread, which is 2.4% of its price: twenty times more expensive in proportion.

The spread also changes during the session. It’s usually wider in the first few minutes after the open, while the market digests the overnight news, and it narrows as more volume comes in.

How much it matters for your style

If you enter and exit at market, every round trip costs you the spread. For someone who makes a few trades a month, it’s a detail. For a style with many trades a day, like scalping or day trading, it can be the main cost.

Example: 10 trades a day with 200 shares and a $0.02 spread add up to 10 × 200 × 0.02 = $40 a day, before commissions. Over 20 sessions, that’s $800.

In swing trading, on the other hand, a trade aiming to make $3 per share barely feels a $0.02 spread.

The spread in other markets

The idea is the same in every market, although the unit changes. In forex the spread is measured in pips, in futures in ticks, and in crypto it’s usually expressed as a percentage. In every case it answers the same question: how much does it cost you to get in and out immediately?

How to reduce its impact

• Use limit orders, which lock in the price in exchange for not guaranteeing execution.
• Favor liquid assets and regular trading hours.
• Avoid entering during the most chaotic minutes, such as right after major news.
• In forex and CFDs (contracts for difference), check the broker’s typical spread: that’s often its main way of getting paid, even when it advertises commission-free trading.