Bid-Ask Spread: The Gap Between Buying and Selling Prices

By Imperialpedia Staff

The bid-ask spread is the gap between the highest price a buyer is currently willing to pay for a security, the bid, and the lowest price a seller is currently willing to accept, the ask. Anyone who buys at the ask and immediately tries to sell back at the bid pays this spread as an implicit transaction cost, separate from any brokerage commission.

What Makes a Spread Tight or Wide

Heavily traded securities with lots of buyers and sellers tend to have tight spreads, sometimes just a penny, because competition among market participants keeps quotes close together. Thinly traded stocks, smaller companies, or securities during volatile news events tend to have much wider spreads, since fewer participants are actively quoting prices and market makers demand more compensation for the added risk.

Spread as a Hidden Trading Cost

Even with zero-commission trading now common, the bid-ask spread remains a real cost that's easy to overlook, since it's baked into the execution price rather than shown as a separate line-item fee. Frequent traders in wide-spread securities can lose a meaningful amount of return purely to repeatedly crossing the spread.

Spreads Widen When Liquidity Dries Up

During market stress, spreads on even normally liquid securities can widen sharply as market makers pull back and become more cautious about taking on inventory risk. This is one reason trading costs during a panic are often much higher than they appear on an ordinary trading day.

Table of Contents

Bid-Ask Spread: The Gap Between Buying and Selling Prices

What Makes a Spread Tight or Wide

Spread as a Hidden Trading Cost

Spreads Widen When Liquidity Dries Up

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