Bid-Ask Spread

Loading the player...

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.

RELATED TERMS
  1. Bid And Asked

    A two-way price quotation that indicates the best price at which ...
  2. Right Hand Side - RHS

    The ask or offer price of a foreign exchange rate. A quote for ...
  3. Spread Indicator

    An indicator that shows the difference between the bid and ask ...
  4. Crossed Market

    A situation arising when the bid price of a security exceeds ...
  5. Price Tension

    The phenomenon by which the seller of a particular good, service ...
  6. Reduced Spread

    A reduction in the spread between the buy/bid and sell/ask price ...
Related Articles
  1. Investing Basics

    How To Calculate The Bid-Ask Spread

    It's very important for every investor to learn how to calculate the bid-ask spread and factor this figure when making investment decisions.
  2. Professionals

    Spread Calculations

    CFA Level 1 - Spread Calculations. Learn how to calculate the bid-ask spread in a foreign currency quote. Reveals the factors influencing the size of bid-ask spreads
  3. Trading Strategies

    Disadvantages of Pairs Trading

    Aside from the risks associated with pairs trading, there are a number of disadvantages to this investment technique of which traders should be aware. Perhaps the most obvious disadvantage is ...
  4. Investing Basics

    Understanding Liquidity Risk

    Learn about the two types of liquidity risk: funding liquidity risk and market liquidity risk.
  5. Investing

    Penny Stocks

    Learn more about this cheap stock and how its high risk nature, large bid-ask spreads and lack of liquidity may not make it the most wise investment.
  6. Active Trading Fundamentals

    What Does Bid And Asked Mean?

    Bid and asked is a two-way price quotation.
  7. Professionals

    Spreading

    Spreading
  8. Options & Futures

    Option Spreads: Tips And Things To Consider

    By John Summa, CTA, PhD, Founder of OptionsNerd.comNow that you have obtained a solid foundation for underlying option spreads, here are some tips on how to use them. In this section, we'll ...
  9. Investing Basics

    The Basics Of The Bid-Ask Spread

    The bid-ask spread is essentially a negotiation in progress. To be successful, traders must be willing to take a stand and walk away in the bid-ask process through limit orders.
  10. Investing Basics

    What is Spread?

    Spread has several slightly different meanings depending on the context. Generally, spread refers to the difference between two comparable measures.
RELATED FAQS
  1. What's the difference between bid-ask spread and bid-ask bounce?

    Understand the difference between the bid-ask spread that determines the buy or sell price for a stock and a bid-ask bounce, ... Read Answer >>
  2. What are the determinants of a stock's bid-ask spread?

    Stock exchanges are set up to assist brokers and other specialists in coordinating bid and ask prices. The bid price is the ... Read Answer >>
  3. How do I use the bid-ask spread to evaluate whether I should buy a particular stock?

    Understand the significance of the bid-ask spread for investors in making a decision on whether or not to purchase a particular ... Read Answer >>
  4. What types of stocks have a small difference between bid and ask prices?

    Learn more about bid-ask spreads and why stocks with high levels of liquidity and low levels of volatility usually have narrow ... Read Answer >>
  5. What does the variance between the bid and ask price of a stock mean?

    Find out how stocks are traded in the market, why the bid and ask prices are different and why the bid-ask spread is smallest ... Read Answer >>
  6. What types of stocks have a large difference between bid and ask prices?

    Find out which factors influence bid-ask spread width. Learn why some stocks have large spreads between bid and ask prices, ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center