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. Spread Indicator

    An indicator that shows the difference between the bid and ask ...
  3. Spread

    1. The difference between the bid and the ask price of a security ...
  4. Ask

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

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

    The phenomenon by which the seller of a particular good, service ...
Related Articles
  1. Markets

    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.
  2. Trading

    Understanding Liquidity Risk

    Make sure that your trades are safe by learning how to measure the liquidity risk.
  3. Trading

    Trading Calendar Spreads In Grain Markets

    Futures investors flock to spreads because they hold true to fundamental market factors.
  4. Markets

    How Bid Price Affects Liquidity

    The bid price is the amount a buyer will pay for a security.
  5. Trading

    Option Spreads: Vertical Spreads

    By John Summa, CTA, PhD, Founder of OptionsNerd.comLimiting Risk with Long and Short Options Legs We have seen that a spread is simply the combination of two legs, one short and one long (but ...
  6. Trading

    S&P 500 Options On Futures: Profiting From Time-Value Decay

    Writing bull put credit spreads are not only limited in risk, but can profit from a wider range of market directions.
  7. Trading

    Why Financial Spread Betting Gets a Bad Rap

    Spread betting lets speculators trade on price movements. Investors predict whether the spread between the bid price and the ask price will rise or fall.
  8. Trading

    Option Spreads: Credit Spreads Structure

    By John Summa, CTA, PhD, Founder of OptionsNerd.comNow that you have a basic idea of what an option spread looks and feels like (of course limited to our simple vertical bull call spread), let's ...
  9. Trading

    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 ...
  10. Investing

    Negotiating the Bid

    A bid is an offer investors make to buy a security.
RELATED FAQS
  1. 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 >>
  2. 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 >>
  3. How do I use a limit order in conjunction with a bid-ask spread?

    Understand the concept of the bid-ask spread as it applies to trading and how it impacts the pricing of limit orders used ... Read Answer >>
  4. Should I enter a limit order to buy a position with a bid and ask that are far apart?

    Learn more about order types and why entering limit orders to buy a security may help to mitigate the impact of wide bid-ask ... Read Answer >>
  5. What are common factors that affect a security's spot rate?

    Learn the common factors influencing the spot rate for an asset including the bid-ask spread and the forward term structure ... Read Answer >>
  6. How are after hour trading rates determined?

    I am new to stock buying and I was just wondering that if I buy stocks after trading hours (normally 4.30 EST for NASDAQ) ... Read Answer >>
Hot Definitions
  1. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  2. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  3. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  4. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  5. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  6. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
Trading Center