Key takeaways
- The bid is the highest price a buyer is currently offering; the ask, or offer, is the lowest price a seller will accept; the spread is the difference.
- A market buy generally fills at or near the ask and a market sell at or near the bid, so buying and immediately selling loses the spread.
- Measure the spread as a percentage of the midpoint to compare stocks with different prices.
- Market makers and dealers can earn the spread by buying at the bid and selling at the ask.
- The spread is one measure of liquidity, and a limit order lets you choose where inside the spread to wait, at the risk of not being filled.
A stock does not have one price. At any moment it has two: the price buyers are bidding and the price sellers are asking. The gap between them is the bid–ask spread, and it is a cost of trading that never appears as a line on a statement. You pay it by buying a little higher, or selling a little lower, than the "price" in the headline.
Bid, ask and spread
Investor.gov's glossary defines the terms precisely:
- The bid is the highest price a buyer will pay for a specified number of shares at any given time.
- The ask (also called the offer) is the lowest price at which a seller will sell.
- The spread is the difference between them.
Investor.gov adds that the bid will almost always be lower than the ask. A quote screen may show both, sometimes with the number of shares available at each, along with the last trade, which is a different thing: the price at which the most recent trade happened. How to read a stock quote walks through the rest of the screen.
Why you buy at the ask and sell at the bid
Investor.gov's page on types of orders explains that a market order generally executes at or near the current ask for a buy, and at or near the current bid for a sell. That is simply who is on the other side: to buy right now, you take the cheapest offer for sale; to sell right now, you take the best offer to buy.
A worked round trip. A stock is quoted at $20.00 bid, $20.05 ask.
| Step | Price | Value of 100 shares |
|---|---|---|
| Market buy | $20.05 (the ask) | You pay $2,005 |
| Immediate market sell | $20.00 (the bid) | You receive $2,000 |
| Result | −$5, before any fees |
Nothing about the company changed, and the quoted price did not move, but the round trip cost $5. For someone who trades often, spreads add up quickly, alongside commissions and taxes.
Measuring the spread
The dollar spread alone is misleading: 5 cents on a $5 stock is very different from 5 cents on a $500 stock. Wikipedia's article on the bid–ask spread notes that it is often expressed as a percentage of the midpoint (the average of bid and ask):
spread % = (ask − bid) ÷ midpoint × 100.
| Bid | Ask | Spread | Midpoint | Spread % |
|---|---|---|---|---|
| $20.00 | $20.05 | $0.05 | $20.025 | about 0.25% |
| $4.95 | $5.05 | $0.10 | $5.00 | 2.0% |
| $499.90 | $500.10 | $0.20 | $500.00 | 0.04% |
The second row's spread is only 10 cents, but on a $5 share it is eight times as expensive, proportionally, as the first. For quick mental estimates, our guide to working out percentages in your head helps.
Who earns it
Some firms make a business of standing in the middle. Investor.gov describes market makers, firms that stand ready to buy or sell a stock at publicly quoted prices, and notes that a broker that fills your order from its own inventory, called internalisation, may make money on the spread. Wikipedia describes the same logic from the other side: for a round trip, the trader who demands immediate execution pays the spread, and the party supplying liquidity earns it. How the stock market works covers who these firms are.
Why some spreads are wide
Wikipedia calls the size of the spread one measure of a market's liquidity and of its transaction cost, and gives lower trading volume and less liquidity as reasons some markets have wider spreads. Investor.gov adds that prices can change quickly in fast-moving markets, so the price you saw may not be the one you get. Trading volume is one rough indicator of how actively a stock changes hands.
A wide spread is not in itself a sign of anything improper, but it is a cost, and it is worth noticing before you trade.
Working with the spread
- Look at the bid and ask, not just the last price, before placing an order.
- Consider a limit order. A limit order lets you choose a price, for example inside the spread, and wait. The trade-off is that it may not fill.
- Count the spread as a cost when comparing how often to trade.
Learn to Trade Stocks Beginner lets you practise placing market and limit orders with a virtual balance, so you can try both order types without real money at stake. It sits among our education apps, and the investing basics hub lists the related guides.
Good to know
Frequently asked questions
What is the bid–ask spread?
Why does the spread cost me money?
How do you calculate the spread as a percentage?
Who earns the spread?
Sources
- Bid Price/Ask Price (glossary) (opens in a new tab)Investor.gov, U.S. Securities and Exchange Commission — accessed
- Executing an Order (opens in a new tab)Investor.gov, U.S. Securities and Exchange Commission — accessed
- Understanding Order Types – Investor Bulletin (opens in a new tab)Investor.gov, U.S. Securities and Exchange Commission — accessed
- Types of Orders (opens in a new tab)Investor.gov, U.S. Securities and Exchange Commission — accessed
- Bid–ask spread (opens in a new tab)Wikipedia — accessed
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