Bid, ask and the spread
Lesson 4 · about 8 min
Ask a beginner what a stock costs and they will give you one number. Ask a trader and they will give you two. There is never one price; there is the price buyers are offering and the price sellers are demanding, and the gap between them is where a lot of your money quietly goes.
Two prices, always
- The bid is the highest price anyone is currently willing to pay. If you want to sell right now, this is what you get.
- The ask (also called the offer) is the lowest price anyone is currently willing to sell for. If you want to buy right now, this is what you pay.
- The spread is ask minus bid.
Suppose a stock shows:
Bid: 50.00 x 300 Ask: 50.02 x 500
That means someone will buy 300 shares from you at $50.00, and someone will sell you 500 shares at $50.02. The spread is $0.02. If you bought and immediately sold, you would lose $0.02 per share, plus any commissions, without the price having moved at all.
The single number on a news site or a phone app is usually the last trade price, which we cover in the next lesson. It is not what you will pay.
Why the spread exists
The spread is the market maker's fee for being there. Someone has to be willing to sell to you at 10:03:17 when no natural seller happens to be around, and to buy from you at 10:03:19 when no natural buyer is. Market makers do that, and the spread compensates them for two things:
- Inventory risk. They are holding shares they do not want, and the price could move against them before they unload.
- Adverse selection. Some of the people trading with them know something. The spread is insurance against being on the wrong side of an informed trader.
The riskier and less liquid the product, the wider the spread. A mega-cap US stock might have a spread of one cent on a $200 share, about 0.005%. A thinly traded small-cap could have a spread of 2% or more. An out-of-the-money option might show a bid of $0.10 and an ask of $0.25, a 150% spread.
The spread is a cost, every single time
Beginners obsess over commissions and ignore spreads. That is backwards. With most US stock brokers now charging zero commission, the spread is often the only cost you pay, and it can be far larger than any commission ever was.
Work it out for a hypothetical trade:
| Wide-spread stock | Tight-spread stock | |
|---|---|---|
| Bid | $4.90 | $150.00 |
| Ask | $5.00 | $150.01 |
| Spread | $0.10 (2.0%) | $0.01 (0.007%) |
| You buy 1,000 shares at the ask | $5,000 | $150,010 |
| Immediate value at the bid | $4,900 | $150,000 |
| Instant cost of the spread | $100 | $10 |
On the first stock you are down 2% the moment you enter. You need the price to rise 2% just to break even. If you trade that stock 50 times a year, the spread alone costs you 100% of your position size. That is not an exaggeration; it is arithmetic.
Key idea: The spread is a toll you pay to enter and exit immediately. Measure it as a percentage of the price and compare it to the move you are hoping to capture. If the toll is a big fraction of the target, the trade is bad before it starts.
Reading spreads as information
The spread is also a live read on how nervous the market is. Watch it:
- Spread widens suddenly around a news release, at the open, or during a crash. Market makers pull back because inventory risk just jumped. Your fills get worse at exactly the moment you most want to act.
- Spread tightens during calm, high-volume periods. That is when execution is cheapest.
- Spread is permanently wide in a product nobody trades. That is a warning that getting out could be painful.
One habit: before entering anything, look at the spread as a percentage. If it is above roughly 0.1% in a stock, or a large fraction of the option premium, understand that you are paying a real price for immediacy and consider a limit order instead (Module 3).
Where the numbers differ around the world
Everything above applies to every market. The differences are in units:
- Stocks quote in currency per share, with a minimum tick size (in the US, $0.01 for most stocks above $1).
- Forex quotes to four or five decimals and measures spreads in pips (0.0001 for most pairs). A 1-pip spread on EUR/USD is about 0.01%.
- Futures have exchange-defined ticks; the E-mini S&P 500 moves in 0.25-point ticks worth $12.50 each.
- Crypto exchanges quote to many decimals and spreads vary enormously between venues and coins.
Try it: Open a free quote for a large stock, a small stock, a currency pair and a crypto coin. For each, write down the bid, the ask, and the spread as a percentage of the price. Rank them. You have just done the first piece of real analysis most beginners skip.
Recap
- Every market shows two prices: the bid (best buyer) and the ask (best seller).
- Buying at the ask and selling at the bid loses you the spread immediately.
- The spread compensates market makers for inventory risk and informed traders.
- Measure spread as a percentage of price; wide spreads make short-term trades unprofitable before they start.
- Spreads widen when the market is nervous and narrow when it is calm.
See it drawn
Original diagrams for the ideas on this page. Illustrative, not real market data.