What Is the Bid-Ask Spread?
The bid-ask spread is the difference between the bid, the highest price a buyer is currently willing to pay for a security, and the ask (or offer), the lowest price a seller is currently willing to accept. If a stock is quoted at $24.95 bid and $25.00 ask, the spread is 5 cents.
In practice, buyers who want to trade immediately pay the ask, and sellers who want to trade immediately receive the bid, so the spread is the built-in cost of demanding instant execution.
How It Works
Spreads are set by market makers and other liquidity providers who continuously quote both a bid and an ask, earning the spread as compensation for standing ready to trade and for the risk of holding inventory. The more actively an asset trades and the less its price jumps around, the tighter the spread can be.
That is why heavily traded large-cap stocks and major currency pairs trade with razor-thin spreads, while small-cap stocks, junk bonds, and exotic derivatives trade with wide ones. Spreads also widen during volatile periods, when market makers face greater risk of being run over by fast-moving prices.
Example
Suppose a small-cap stock is quoted $19.80 bid / $20.20 ask, a 40-cent spread. If you buy 1,000 shares at the ask for $20,200 and immediately sold them at the bid, you would receive $19,800, so the round trip costs $400, or about 2% of your money, before the price even moves.
Compare that with a mega-cap stock quoted $50.00 / $50.01, where the same round trip on a $20,000 position costs roughly $4. As a percentage, Spread % = (Ask - Bid) / Midpoint, which is 2% in the first case and 0.02% in the second.
Why It Matters
The spread is the most fundamental trading cost, and over many trades it can meaningfully erode returns, especially for active strategies in less liquid names. It is also the cleanest real-time indicator of liquidity: watching spreads widen is watching liquidity drain from a market.
Market making, the business of earning the bid-ask spread at scale, is a core function of sales and trading desks and firms across Wall Street.
