TL;DR: The bid is the highest price buyers currently offer, the ask is the lowest price sellers currently accept, and the spread is the gap between them. Illustrative example only: a stock is quoted bid $49.90 and ask $50.10. The spread is $0.20, since $50.10 minus $49.90 equals $0.20, which is 0.40 percent of the $50.00 midpoint, since $0.20 divided by $50.00 multiplied by 100 equals 0.40 percent. Buying 500 shares at the ask instead of the midpoint costs an extra $50, since 500 multiplied by $0.10 equals $50.
Key Takeaways
- The worked example in this draft is fully illustrative. Its arithmetic is recorded in Sources and method below and was recomputed for this draft.
- Definitions here follow standard filing usage. Where providers or filings use a different definition, the draft says so and tells you to check which one a source is using.
- This is educational information, not financial advice, and it is not a recommendation to buy, sell, or hold any security or fund.
Work the quoted example in full
All figures in this section are illustrative. There is never one price for a traded stock. There is a price you can sell at now, the bid, and a price you can buy at now, the ask. In the example the midpoint, halfway between them, is $50.00. The spread of $0.20 is the distance a round trip crosses. Buy at the ask and immediately sell at the bid, with no price movement at all, and $0.20 per share is gone. That is why the spread is called a transaction cost even though no one sends you a bill for it.
Expressed as a percentage of the midpoint, 0.40 percent here, spreads can be compared across stocks of different prices. A $0.20 spread on a $50 stock and on a $5 stock are very different costs. Order types interact with the spread directly. A market order, in what is a market order, crosses the spread immediately. A limit order, in what is a limit order, can wait inside or beyond it, trading speed for price.
What makes a spread wide or narrow
Liquidity is the main driver. Heavily traded shares in large companies, of the kind described in what is market cap, usually have many competing buyers and sellers and therefore the narrowest spreads in the market. Thinly traded shares, fast moving news, and the opening and closing minutes of the session widen spreads, because the traders quoting prices demand more compensation for the risk of being on the wrong side of the next move.
Volatility measures such as the VIX, covered in what is the VIX, tend to rise alongside wider spreads across the market. For a long term investor making occasional trades, the spread is a minor cost. For anyone trading frequently or trading illiquid names, it is a recurring toll that strategy returns must overcome before any profit exists.
How an ordinary investor should treat it
Check the spread before trading anything unfamiliar. If the quoted spread is a large percentage of the price, consider a limit order and patience instead of a market order, and be extra careful outside regular hours, when spreads widen, a feature of the session covered in premarket and after hours trading explained. Avoid judging a trade result without it, too. A position showing an instant small loss after purchase is often just the spread being marked, not the investment moving against you.
None of this makes wide spread stocks untouchable. It means their trading costs belong in the decision, in dollars, before the trade, not discovered afterwards.
Order design is the other lever on trading cost: a bracket order pre-plans both exits before the entry ever fills. This article is educational information, not financial advice. Prices, company figures, and fund figures in the worked example are illustrative and are not figures for any real security, company, or fund.
Sources and method
- Target keyword: "bid ask spread explained" from .saeo/keywords.yaml (queue entry added 2026-10-31). No search volume or difficulty figure is claimed; both are recorded as unknown in the queue entry.
- All figures are labelled illustrative examples. Arithmetic verified for this draft on 2026-10-31 by recomputation in Python: 50.10 minus 49.90 equals 0.20; 0.20 divided by 50.00 multiplied by 100 equals 0.40 percent; 500 multiplied by 0.10 equals 50.
- Internal links checked against existing drafts in this folder on 2026-10-31: what-is-a-market-order, what-is-a-limit-order, what-is-market-cap, what-is-the-vix, premarket-and-after-hours-trading-explained.
- Distinction check: Market and limit order explainers exist. No explainer covered the spread between bid and ask itself.
