Bid-Ask Spread

AAA

DEFINITION of 'Bid-Ask Spread'

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.

INVESTOPEDIA EXPLAINS '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.

VIDEO

Loading the player...
RELATED TERMS
  1. Market-Maker Spread

    The difference between the price at which a market maker is willing ...
  2. Right Hand Side - RHS

    The ask or offer price of a foreign exchange rate. A quote for ...
  3. Left-Hand Side

    The bid side in a two-way price quote. A two-way price quote ...
  4. Ask

    The price a seller is willing to accept for a security, also ...
  5. Locked Market

    A market in which a stock's bid and ask prices are identical. ...
  6. Bid

    1. An offer made by an investor, a trader or a dealer to buy ...
RELATED FAQS
  1. What are some examples of financial spread betting?

    Financial spread betting is available across a wide array of markets. Financial spread betting is primarily aimed at making ... Read Full Answer >>
  2. What options strategies are best suited for investing in the metals and mining sector?

    In the past, the only way an investor could gain exposure to the precious metals market was through a commodities brokerage ... Read Full Answer >>
  3. How do I use the bid-ask spread to evaluate whether I should buy a particular stock?

    All equity investors should have a firm understanding of the significance of the bid-ask spread in trading. There is always ... Read Full Answer >>
  4. How do I use a limit order in conjunction with a bid-ask spread?

    There is always a bid-ask spread involved in the purchase or sale of any investment asset. The bid represents the price available ... Read Full Answer >>
  5. What are the risks involved in OTC (over-the-counter) trading?

    The primary risks involved in trading over-the-counter (OTC) stocks stem from lack of reliable information and the fact that ... Read Full Answer >>
  6. What's the difference between bid-ask spread and bid-ask bounce?

    Although both the bid-ask spread and the bid-ask bounce relate to the bid-ask price of a stock or other investment, they ... Read Full Answer >>
  7. Is short selling a form of insurance?

    Short selling really isn't a form of insurance. It is the opposite of going long or buying a stock with the hope that the ... Read Full Answer >>
  8. I don't understand how a stock has a trading price of 5.97, but when I buy it I have ...

    It might seem logical that the last traded price of a security is the price at which it would currently be trading, but this ... Read Full Answer >>
  9. What do the numbers that follow the bid and ask numbers in stock quotes represent?

    When looking at stock quotes, there are numbers following the bid and ask prices for a particular stock. These numbers usually ... Read Full Answer >>
  10. Why are the bid prices of T-bills higher than the ask prices? Aren't bids supposed ...

    Yes, you are correct that the ask price of a security should typically be higher than the bid price. This is because people ... Read Full Answer >>
  11. 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 Full Answer >>
Related Articles
  1. Investing Basics

    Stock Basics Tutorial

    If you're new to the stock market and want the basics, this is the tutorial for you!
  2. 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.
  3. Trading Strategies

    What Is Spread Betting?

    The temptation and perils of being over leveraged is a major pitfall of spread betting. However, the low capital outlay necessary, risk management tools available and tax benefits make spread ...
  4. 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.
  5. Options & Futures

    Practical And Affordable Hedging Strategies

    Learn how to find and use the most cost-effective ways to transfer risk.
  6. Stock Analysis

    What is the Price-to-Sales Ratio?

    The price-to-sales ratio is an indicator of the value placed on each dollar of a company’s sales or revenues.
  7. Mutual Funds & ETFs

    Which ETF is the Best Bet: VTI or IWV?

    A look at two quality ETFs that offer diversification, low expense ratios, and exposure to the total market.
  8. Investing Basics

    What is Treasury Stock?

    Treasury stock is a company’s own stock that it holds in its treasury for later use.
  9. Investing Basics

    What is a Mid-Cap?

    Mid-cap companies are those with a market capitalization between two and $10 billion.
  10. Fundamental Analysis

    What's a Drawdown?

    A drawdown is usually expressed as a percentage change between the peak price and the low price (trough) of an investment.

You May Also Like

Hot Definitions
  1. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  2. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  3. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
  4. Accrued Interest

    1. A term used to describe an accrual accounting method when interest that is either payable or receivable has been recognized, ...
  5. Absorption Costing

    A managerial accounting cost method of expensing all costs associated with manufacturing a particular product. Absorption ...
  6. Currency Carry Trade

    A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase ...
Trading Center