Trading
Bid-Ask Spread
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Bid price versus ask price
The bid is the highest displayed price a buyer is willing to pay. The ask, or offer, is the lowest displayed price a seller will accept. The SEC's Investor.gov glossary defines the difference between them as the spread.
How to calculate the bid-ask spread
If the best bid is $9.98 and the best ask is $10.02, the quoted spread is $0.04. The percentage spread is commonly calculated as (ask - bid) / midpoint × 100. Here the midpoint is $10.00, so the percentage spread is 0.4%.
Why spreads widen
Spreads tend to widen when trading volume and competition are low, volatility is high, information is uncertain, or the market is closed. They often narrow in liquid securities during normal trading hours because more buyers and sellers compete to trade. A narrow quote can still disappear in a fast market, so displayed liquidity is not guaranteed execution.
How the spread affects returns
A market buyer generally trades near the ask and an immediate seller near the bid. Crossing both sides creates an implicit round-trip cost before commissions or price movement. For a long-term investor the cost may be small, but it compounds for frequent traders and can be material in thin stocks, bonds, options, and ETFs.
Market orders versus limit orders
A market order prioritizes execution and can cross the spread or experience slippage. A limit order controls the worst acceptable price but may not execute. Neither order type is always better; the choice depends on urgency, liquidity, and price risk.
Example
If a stock is bid at $9.98 and offered at $10.02, the bid-ask spread is 4 cents.
Bid-Ask Spread — FAQ
What is Bid-Ask Spread?
The bid-ask spread is the gap between the highest price a buyer will pay and the lowest price a seller will accept, representing a key cost of trading.
Can you give an example of Bid-Ask Spread?
If a stock is bid at $9.98 and offered at $10.02, the bid-ask spread is 4 cents.
Is a smaller bid-ask spread better?
Usually. A narrower spread generally means lower implicit trading costs and better liquidity, although the displayed quote can change before an order executes.
Who earns the bid-ask spread?
Liquidity providers attempt to earn the spread by buying near the bid and selling near the ask, while taking inventory, adverse-selection, and price-movement risk.
Why is the bid lower than the ask?
Buyers seek the lowest price and sellers seek the highest. The gap reflects the prices at which the best displayed buyer and seller are currently willing to trade.
Can a limit order avoid the spread?
A limit order can avoid immediately crossing the spread, but it may not fill. If the market moves away, the missed trade can matter more than the spread saved.
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