What Is the Bid-Ask Spread? The Hidden Cost in Every Trade

The bid-ask spread is the gap between the highest price a buyer is currently willing to pay for an asset, the bid, and the lowest price a seller will accept, the ask. It is the small, immediate cost built into every trade, and it is how the market makers who stand ready to trade with you get paid.

A stock does not have one single price at any instant. It has a price someone will buy at and a slightly higher price someone will sell at, and the difference between them is a cost you pay without ever seeing a separate line item. This page explains what the bid and the ask are, why the spread exists, what makes it wide or narrow, and why it matters. It is descriptive throughout.

The bid, the ask, and the spread

At any moment an asset has two quoted prices:

• The bid is the highest price a buyer is currently offering to pay.
• The ask, also called the offer, is the lowest price a seller is currently willing to take.

The spread is simply the ask minus the bid. If a stock is quoted 50.00 bid and 50.05 ask, the spread is 5 cents. When you buy at market you pay the ask, and when you sell at market you receive the bid, so you cross the spread every time you trade.

Why the spread exists

The spread is the compensation for the market makers and liquidity providers who quote both a buy and a sell price and are always ready to take the other side of your order. They buy at the bid and sell at the ask, earning the spread for providing that instant availability. In a liquid market that service is cheap and the spread is tiny; in an illiquid one it is dear and the spread is wide.

What makes a spread wide or narrow

A few things drive how wide the spread is:

• Liquidity. Heavily traded names, like large cap stocks and major index funds, have many buyers and sellers, so the spread is often a penny or less. Thinly traded small caps have few, so their spreads are wider.
• Volatility. When prices are moving fast, market makers widen the spread to protect themselves, which is why spreads blow out during turbulent moments.
• Time of day. Spreads are usually tightest during regular market hours and wider before the open, after the close, and overnight, when fewer participants are quoting.

Why the spread matters

The spread is a real, if hidden, cost of trading. On a stock with a penny spread it is trivial, but on a wide-spread name it can quietly cost far more than a commission, especially if you trade in and out often. It is one reason liquidity is worth paying attention to.

Kresmion shows the last traded price for a stock on its research page. The live bid and ask, and the spread between them at the exact moment of a trade, are what your broker quotes when you place an order.

Key takeaways

Frequently asked questions

What is the difference between the bid and the ask?

The bid is the best price a buyer is currently willing to pay, and the ask is the best price a seller is currently willing to accept. The ask is always the higher of the two, and the gap between them is the spread.

Why does the bid-ask spread matter?

Because you cross it on every trade: you buy at the higher ask and sell at the lower bid, so the spread is an immediate cost. On liquid stocks it is tiny, but on thinly traded ones it can quietly cost more than a commission.

What makes a spread wide?

Mainly low liquidity. A stock with few buyers and sellers has a wide spread, while a heavily traded one has a narrow one. Fast-moving prices and trading outside regular hours also widen spreads, because market makers protect themselves when risk is higher.

Is the spread a fee?

Not a fee in the usual sense, but it is a real cost. It is the compensation the market maker earns for quoting both sides and taking the other end of your trade instantly, and you pay it by buying at the ask and selling at the bid.

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Source: the bid-ask spread is a standard feature of quoted markets (the gap between the best bid and the best ask). Kresmion shows the last traded price on each research page; the live bid, ask, and spread are quoted by a broker at the moment of a trade. This page is information, not investment advice. Kresmion Research.