Bid-ask spread

The bid-ask spread is the difference between the highest price a buyer is currently willing to pay for a security (the bid) and the lowest price a seller is willing to accept (the ask, or offer). It is the most direct measure of the cost of trading right now.

How it works

If a stock is quoted $20.00 bid and $20.04 ask, the spread is $0.04, or 0.2% of the midpoint. Someone who buys at the ask and immediately sells at the bid loses the full spread.

Spreads are set by supply and demand for liquidity. Market makers and other liquidity providers earn the spread as compensation for holding inventory and taking the risk that prices move against them. Spreads widen when:

• Volume is low, as in pre-market trading or for thinly traded small caps.
• Uncertainty is high, such as right before earnings or around a trading halt.
• The price is low relative to the minimum tick, so a one-cent spread is a large percentage.

The best bid and ask across all US exchanges together form the NBBO.

Why it matters for traders

A wide spread is a hidden cost on every round trip. On a $2 stock quoted $1.95 by $2.05, the spread is about 5%, so a trade needs to move 5% just to break even if you cross it both ways. Limit orders placed inside or at the spread can reduce that cost, at the risk of not getting filled.

Options spreads are often much wider in percentage terms than stock spreads, especially for far out-of-the-money or illiquid contracts.

Example

Hypothetical Northwind Therapeutics (ticker NWTX) is quoted $8.10 by $8.30 in the pre-market after a data readout. A trader who sends a market order for 1,000 shares pays $8,300. If the quote does not move and they sell at the bid, they get $8,100, a $200 loss purely from the spread.

FAQ

Is a tight spread a good sign?

A tight spread means the stock is liquid and cheap to trade. It says nothing about whether the price will rise or fall.