Bid-Ask Spread
The difference between the ask price (sellers want) and the bid price (buyers offer). Represents the cost of liquidity and market maker profit.
The bid-ask spread is the difference between the price sellers are asking (ask price) and the price buyers are bidding (bid price). It represents the immediate cost of trading and is a key component of liquidity.
Formula
Bid-Ask Spread = Ask Price - Bid Price
For example, if buyers are bidding $100 and sellers are asking $100.05, the spread is $0.05, or 5 cents.
Example
Apple (AAPL) trading at $150 might have a bid of $150.00 and an ask of $150.01, a spread of just 1 cent. This tight spread is typical for highly liquid stocks. In contrast, a penny stock (PFLU) might have a bid of $1.00 and an ask of $1.10, a spread of 10%, reflecting the stock's illiquidity.
How to Interpret It
- Tight spread (< $0.05 for stocks over $100): Highly liquid stock. You can buy or sell with minimal cost.
- Wide spread (> $1.00 or > 1% of price): Illiquid stock. Trading will cost you significantly more due to the spread.
- Spread widens during volatility: Market makers widen spreads to protect themselves when prices move rapidly and risk increases.
- Spread narrows with high volume: When many traders are buying and selling, competition drives spreads tighter.
- Large-cap vs. small-cap: Blue-chip stocks like AAPL have penny spreads; micro-caps might have spreads of several cents or more.
- Market hours: Spreads widen during pre-market and after-hours trading when volume is lower.
Limitations
- The quoted bid-ask spread can differ from what you actually pay if you're trading a large block of shares.
- Hidden liquidity (dark pools, iceberg orders) might allow better pricing than the visible spread.
- During market stress, the spread widens significantly, and actual trades may occur worse than the quoted spread.
- Bid-ask spreads favor market makers but are inevitable; someone has to facilitate the trade.
Related Terms
- Liquidity — ease of buying and selling
- Volume — trading activity that creates tight spreads
- Market Maker — professionals who provide liquidity by quoting bids and asks
- Slippage — the cost of large trades due to price impact and spreads