Bid-Ask Spread
IntermediateThe bid-ask spread is the difference between the highest price a buyer will pay for a security and the lowest price a seller will accept.
If a share has a bid price of 9.98 and an ask price of 10.02, the spread is 0.04, about 0.4% of the price. Someone who bought at 10.02 and immediately sold at 9.98 would lose 0.04 per share, even though the share's value had not changed.
The spread is a hidden trading cost. It is paid in addition to any commission and matters especially for investors who trade frequently.
Spreads depend mainly on liquidity, meaning how easily a security can be bought and sold. Shares of large, popular companies that trade millions of times a day often have very narrow spreads, sometimes just a fraction of a cent. Shares of small companies, rarely traded bonds or exotic currencies can have much wider spreads. Spreads also widen during market turmoil, when uncertainty makes dealers more cautious.
Market makers earn income from the spread by buying at the bid and selling at the ask, in return for always being ready to trade.
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