Bid-Ask Spreads Explainer
The bid is the highest displayed price a buyer is willing to pay, while the ask is the lowest displayed price a seller is willing to accept. The difference is the bid-ask spread, an immediate measure of the gap a market order may cross to trade.
Spreads tend to be narrower in heavily traded securities with deep competition and wider in thin, volatile, uncertain, or costly-to-hold markets. The quoted size matters: a large order can consume the best price and execute at progressively worse levels.
The quoted spread uses displayed prices, while the effective spread reflects the actual execution relative to the market midpoint. Hidden orders, price improvement, rebates, routing, and rapidly changing quotes can make realized trading cost differ from a screenshot of the market.
A one-cent spread can be trivial for a high-priced stock and significant for a low-priced one, so percentage cost and trade size belong in the comparison. Investors can use patient limit orders when appropriate, but execution is never guaranteed merely because a desired price appears nearby.
The spread separates the highest displayed buyer from the lowest displayed seller.
Crossing it creates an immediate trading cost.
Competition and depth can narrow spreads; uncertainty and volatility can widen them.
Order size determines how much depth matters.
Price improvement, hidden liquidity, and fast markets affect realized cost.
Measure the fill, not only the quote.
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