The bid-ask spread is the difference between the highest price a buyer will pay and the lowest price a seller will accept for an asset.
- Bid price: The highest current price buyers will pay.
- Ask price: The lowest current price sellers will accept.
- Bid-ask spread: The ask price minus the bid price.
Bid-Ask Spread Example
| Market quote | Meaning |
|---|---|
| Bid | $100.00 |
| Ask | $100.05 |
| Bid-ask spread | $0.05 |
If you buy one share immediately, the order generally executes at the ask price of $100.05. If you sell one share immediately, the order generally executes at the bid price of $100.00.
Assuming the prices do not change, the difference creates a potential $0.05 per-share trading cost. For 100 shares, that difference would be $5. This excludes commissions and other price movements.
How Is the Bid-Ask Spread Calculated?
Bid-ask spread = Ask price - Bid price
Using the example above:
$100.05 - $100.00 = $0.05
You can also express the spread as a percentage of the midpoint price:
Percentage spread = (Ask - Bid) ÷ Midpoint × 100
The midpoint is:
($100.00 + $100.05) ÷ 2 = $100.025
The percentage spread is approximately 0.05%.
Why Does the Bid-Ask Spread Matter?
The bid-ask spread affects the cost of entering and leaving a trade.
A trader who buys at the ask and sells at the bid immediately pays the spread indirectly. The wider the spread, the farther the asset price must move in the trader's favour before the trade covers that cost.
The spread matters most to:
- Day traders
- Scalpers
- High-frequency traders
- Investors trading large positions
- People trading illiquid stocks, options or cryptocurrencies
Long-term investors may feel less impact from a small spread because the spread becomes less important compared with a larger price movement over time.
What Is a Narrow or Wide Spread?
Narrow Spread
A narrow spread means the bid and ask prices are close together. It often points to:
- Strong trading activity
- Higher liquidity
- More buyers and sellers
- Lower immediate trading costs
Large, actively traded stocks such as Apple or Microsoft often have relatively narrow spreads during normal market hours. The spread can still change as market conditions change.
Wide Spread
A wide spread means the bid and ask prices are farther apart. It can result from:
- Low liquidity
- Fewer active buyers or sellers
- Higher trading costs
- Greater price uncertainty
- Trading outside regular market hours
- A fast-moving or volatile market
A wide spread does not automatically make an asset a bad investment. It does make trade execution more expensive and less predictable.
Is the Bid-Ask Spread a Fee?
The bid-ask spread is not usually a separate fee charged by your broker. It is the difference between the available buying and selling prices in the market.
It still works like a trading cost:
- Buyers pay the ask price.
- Sellers receive the bid price.
- The difference is the spread between those prices.
The spread is separate from:
- Brokerage commissions
- Exchange fees
- Regulatory fees
- Financing or margin charges
- Slippage
A broker can advertise commission-free trading while the bid-ask spread still affects the cost of a trade.
Bid Price vs Ask Price
| Term | Definition | Usually used by |
|---|---|---|
| Bid | Highest price a buyer will pay | Sellers |
| Ask | Lowest price a seller will accept | Buyers |
| Spread | Difference between the bid and ask | All market participants |
A market buy order generally executes against available ask prices. A market sell order generally executes against available bid prices.
A limit order lets you set the maximum price you will pay when buying or the minimum price you will accept when selling. It may improve the price you receive, but it may not execute if the market does not reach your specified price.
What Causes the Bid-Ask Spread to Change?
The spread changes with market conditions. Common influences include:
- Liquidity: More trading activity generally leads to a narrower spread.
- Volatility: Rapid price movements can cause spreads to widen.
- Trading volume: Low-volume assets often have fewer competitive quotes.
- Market hours: Spreads may widen before the market opens, after it closes or during overnight trading.
- Asset type: Stocks, options, forex pairs and cryptocurrencies have different liquidity conditions.
- Order size: A large order can use up the best available prices and receive progressively worse prices.
How Can Traders Reduce the Impact of the Spread?
You can reduce the effect of the spread by:
- Trading liquid assets with high trading volume.
- Checking the spread before placing an order.
- Considering limit orders instead of market orders.
- Avoiding periods of unusual volatility.
- Taking care with pre-market, after-hours and overnight trading.
- Comparing the spread with any advertised commission.
- Checking whether a large order could move through multiple price levels.
Bid-Ask Spread in Stocks, Forex and Crypto
The same basic concept applies across markets:
- Stocks: A quote might show a $49.99 bid and a $50.01 ask.
- Forex: Currency pairs show bid and ask prices, with the spread often measured in pips.
- Cryptocurrency: Spreads can vary widely between exchanges and trading pairs because liquidity differs.
- Options: Spreads can be wider for contracts with low volume, distant strike prices or long expiration dates.
Bottom Line
Check the bid, ask and spread before placing an order. A commission-free trade can still carry a spread-related cost, especially when you trade frequently, place large orders or choose an asset with limited liquidity.