BID-ASK SPREAD
Back to GlossaryDefinition
The difference between the highest price buyers are willing to pay (bid) and the lowest price sellers will accept (ask); a key measure of trading costs and liquidity.
Summary
The bid-ask spread is like the difference between what buyers are offering to pay and what sellers are asking for in any marketplace. Think of it as a 'transaction tax' that traders pay - the wider the spread, the more expensive it is to buy and sell. A narrow spread indicates a liquid, efficient market where many buyers and sellers are active, while a wide spread suggests fewer participants and higher trading costs. This spread represents the profit margin for market makers who facilitate trades.
Usage Context
Critical when learning about market microstructure, trading costs analysis, investment execution strategies, and understanding market efficiency. Essential for practical trading decisions and portfolio management.
Common Confusions
- Thinking the spread is a fee charged by brokers rather than a market phenomenon
- Confusing bid-ask spread with brokerage commissions
- Believing that spreads are fixed rather than constantly changing
- Not understanding that you 'pay' the spread when both buying and selling
- Assuming all securities have similar spread sizes
