Bid-Ask Spread

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What is a 'Bid-Ask Spread'

A bid-ask spread is the amount by which the ask price exceeds the bid. This is essentially the difference in price between the highest price that a buyer is willing to pay for an asset and the lowest price for which a seller is willing to sell it.

BREAKING DOWN 'Bid-Ask Spread'

For example, if the bid price is $20 and the ask price is $21 then the "bid-ask spread" is $1.

The size of the spread from one asset to another will differ mainly because of the difference in liquidity of each asset. For example, currency is considered the most liquid asset in the world and the bid-ask spread in the currency market is one of the smallest (one-hundredth of a percent). On the other hand, less liquid assets such as a small-cap stock may have spreads that are equivalent to a percent or two of the asset's value.

Knowing the Bid-Ask spread could help in your investing strategy. Read How to Calculate the Bid-Ask Spread and The Basics of the Bid-Ask Spread to learn more about this concept.

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  3. How do I use the bid-ask spread to evaluate whether I should buy a particular stock?

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