Bid-Ask Spread

Every tradable asset has two prices at any moment, not one. The bid is the highest price someone is currently willing to pay. The ask (or offer) is the lowest price someone is currently willing to sell at. The difference between them is the bid-ask spread, and it is a cost you pay, quietly, on almost every trade.

Reading a quote#

A quote for a stock might look like this:

That means buyers are waiting to purchase 300 shares at $49.98, sellers are waiting to sell 500 shares at $50.02, and the last trade happened at $50.00. The spread is $50.02 minus $49.98, or $0.04. The midpoint, halfway between, is $50.00.

If you want to buy right now, you pay the ask: $50.02. If you want to sell right now, you receive the bid: $49.98. Nobody trades at the "price" you see in the headline unless they wait for it.

Why the spread exists#

The spread is the price of immediacy. Someone has to be willing to sit in the market, ready to buy from you when you want to sell and sell to you when you want to buy. Often that is a market maker. They quote both sides and earn the spread for taking on the risk that the price moves against them while they hold inventory. In a busy market, many of them compete, which squeezes the spread toward the smallest possible step, the tick size.

What the spread really costs#

If you buy at the ask and immediately sell at the bid, you lose the full spread even though "the price" did not move. That is the round trip cost of crossing the spread both ways.

It is more useful to think about the spread as a percentage than in cents. The formula is:

Spread % = (Ask − Bid) ÷ Midpoint × 100

For a trader who makes many trades, spread costs can easily be larger than commissions. That is why active traders gravitate to the most liquid markets and why the Spread Costs lesson exists later in the school.

What makes spreads wide or narrow#

Spreads widen when uncertainty rises because market makers risk being caught on the wrong side of a sudden move, so they demand more to stand in the way. Right before a major data release or earnings, spreads can widen several times over and then snap back. See Volatility and Liquidity.

How to pay less of the spread#

1. Use limit orders. A limit order lets you choose your price. Placing a buy at the bid or slightly above, instead of paying the ask, can save the spread entirely if someone sells to you. The tradeoff is that your order may not fill.
2. Trade liquid markets and liquid hours. Avoid the first and last minutes of the session unless you have a reason to be there.
3. Check the spread before every order. If it is unusually wide, wait. Your idea will rarely disappear in the next minute.
4. Be careful with market orders in thin markets. A market order guarantees a fill but not a price, and in a thin book it can fill well past the ask. That extra cost is Slippage.

Spreads in other markets#

The idea is the same everywhere, only the units change:

• Forex quotes spreads in pips. EUR/USD might be quoted at 1.08502 / 1.08510, a spread of 0.8 pips. See Pips and Pipettes.
• Futures quote spreads in ticks. A liquid contract is often one tick wide.
• Crypto spreads on major coins at large exchanges are tiny; on small tokens they can be several percent.
• Prediction markets quote spreads in cents per share. If a Polymarket share is bid 61¢ and offered 63¢, crossing the spread costs 2¢ on a share that pays $1. See What Are Prediction Markets?.
• Options often have much wider spreads than the stock underneath, sometimes 5% to 10% of the option price.

Key takeaways#

• There are always two prices: you buy at the ask and sell at the bid.
• The spread is a real cost on every trade that crosses it, measured best as a percentage.
• Spreads widen when liquidity is thin or uncertainty is high.
• Limit orders, liquid markets and patience are the cheapest ways to trade.

Next, learn how to choose between paying the spread and waiting for your price in Order Types Explained.

Frequently asked questions#

Who gets the bid ask spread?#

Whoever provides the liquidity you trade against, usually a market maker or another trader with a resting limit order. They earn the spread for being ready to trade with you immediately.

What is a good bid ask spread?#

For large company stocks, a spread of one cent or a few hundredths of a percent is normal. As a share of the price, below 0.1% is tight for most stocks. Spreads of 1% or more are wide and make short term trading expensive.

Why does the spread widen?#

Spreads widen when liquidity is thin or uncertainty is high, such as at the open, at the close, overnight and around big news. Market makers ask for more to compensate for the risk of a sudden move.

How do I avoid paying the spread?#

Use limit orders at or inside the spread instead of market orders, and trade during the most liquid hours. You will not fill every time, but when you do, you keep part or all of the spread.

Sources#

• U.S. Securities and Exchange Commission, Bid ask spread
• Wikipedia, Bid ask spread