How markets work
Bid-ask spread
Also called Spread or Bid-offer spread
The gap between the highest price anyone will pay and the lowest price anyone will accept.
How it works
The bid is what buyers are offering. The ask (or offer) is what sellers are asking. You buy at the ask and sell at the bid, so the spread is a cost you pay on every round trip, whether or not your broker charges commission.
Spreads are narrow in heavily traded shares and wide in everything else. They also widen when the market is stressed, at the open and close, and around news — exactly the moments people are most likely to trade.
Where it misleads people
The "price" shown on most apps is the last traded price, which is somewhere between the bid and the ask. On an illiquid holding, the price you can actually deal at may be well away from the number on the screen.
Formula
Spread = ask − bid. As a percentage: (ask − bid) ÷ midpoint × 100Worked example
A share quoted 99.90 / 100.10 has a 20-cent spread. Buy and immediately sell and you are down 20 cents a share, about 0.2%, before any commission.
Related terms
- LiquidityHow quickly you can turn something into cash at a fair price, without moving the price against yourself.
- Market makerA firm that continuously quotes both a buy and a sell price, so there is always someone to trade with.
- SlippageThe difference between the price you expected and the price you actually got.
- Limit orderAn instruction to trade only at a specified price or better, accepting that it may never fill.
- Order bookThe live list of every outstanding buy and sell order, arranged by price.
Mentioned in
More in How markets work
- Circuit breaker
- Best execution
- Closing price
- Average daily volume
- Contract note
- Auction
- Custodian
- Algorithmic trading
All 33 How markets work terms · The full glossary, 433 terms
Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.