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Bid-Ask Spread
The difference between the highest price a buyer will pay and the lowest price a seller will accept.
Bid-Ask Spread
The bid-ask spread is the gap between the highest price buyers are offering and the lowest price sellers are accepting.
Components
- Bid: The highest price a buyer is willing to pay
- Ask (Offer): The lowest price a seller is willing to accept
- Spread: Ask − Bid
What the spread tells you
- Narrow spread (e.g., $0.01): High liquidity, actively traded stock
- Wide spread (e.g., $0.50): Low liquidity, less traded stock, or high volatility
Why it matters
The spread is an implicit cost of trading. If you buy at the ask and immediately sell at the bid, you lose the spread amount. For active traders, this cost adds up quickly.
Factors that affect the spread
- Volume: Higher volume → tighter spread
- Volatility: Higher volatility → wider spread
- Market hours: Spreads widen in pre-market and after-hours trading
- Market makers: More market makers → tighter spread
Practical tips
- Use limit orders to avoid paying the full spread
- Check the spread before trading thinly-traded stocks
- Wide spreads can significantly erode returns on frequent trades
Key Takeaways
- Context matters when interpreting any financial metric.
- Combine multiple data points for informed decisions.
- Continue learning to build investment knowledge.
Quick Reference
Category
Market Structure
Difficulty
Beginner
Reading Time
1 min
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Where You'll See This
This concept appears throughout stock detail pages and financial data.