Definition
The bid-ask spread is the difference between the highest price a buyer is willing to pay (the bid) and the lowest price a seller will accept (the ask). It is the cost of buying and then selling immediately.
How it works
Spread = ask − bid. The midpoint, (bid + ask) ÷ 2, is often used as the fair reference price. To compare assets with very different prices, the spread is expressed as a percentage: % spread = (ask − bid) ÷ midpoint × 100. A market order to buy fills at the ask and a market order to sell fills at the bid, so a trader who buys and sells straight away loses the spread.
Spreads are set by the orders waiting in the market. In heavily traded stocks, major currency pairs and large coins, many buyers and sellers compete, so spreads are usually very narrow. In small coins, thinly traded stocks and less common currency pairs, spreads can be many times wider. In currency markets the spread is often quoted in pips, and some brokers earn their income from the spread rather than a separate fee.
Spreads are not constant. They tend to widen around major news, at the open and close of trading sessions, outside main trading hours and during sharp moves, when liquidity providers pull back. The quoted spread covers only the best price level; a large order can run past it and pay more through slippage.
Example (hypothetical numbers)
Suppose Company X shares have a bid of $49.95 and an ask of $50.05.
Spread = $50.05 − $49.95 = $0.10; midpoint = ($49.95 + $50.05) ÷ 2 = $50.00; % spread = $0.10 ÷ $50.00 = 0.2%.
Buying 100 shares and selling them straight away costs 100 × $0.10 = $10 before fees.
Token Y has a bid of $0.98 and an ask of $1.02: a spread of $0.04 on a $1.00 midpoint, or 4%, so the same round trip on 1,000 units costs $40.
The percentage spread shows that Token Y is far more expensive to trade, even though its dollar spread is smaller.
Common mistakes
- Comparing spreads in dollars across assets with very different prices instead of in percent.
- Ignoring the spread when a platform advertises zero-fee trading.
- Trading with market orders around major news, when spreads are often at their widest.
Related calculators
This glossary is for education only and is not investment advice. Examples use hypothetical numbers.