Bid-Ask Spread

Published Aug 10, 2023

Definition of Bid-Ask Spread

The bid-ask spread is the difference between the highest price a buyer is willing to pay for a security (the bid price) and the lowest price a seller is willing to accept (the ask price). That means it is the difference between the highest price a buyer is willing to pay and the lowest price a seller is willing to accept.

Example

To illustrate this, let’s look at the stock market. Let’s assume a stock is currently trading at $50 per share. The highest price a buyer is willing to pay for the stock is $50.50 (the bid price). Meanwhile, the lowest price a seller is willing to accept is $50.25 (the ask price). That means the bid-ask spread for this stock is $0.25.

Why Bid-Ask Spread Matters

The bid-ask spread is an important concept in the stock market. It is an indication of the liquidity of a stock. That means the wider the spread, the less liquid the stock is. That is because it indicates that there are fewer buyers and sellers in the market. As a result, it is more difficult to buy or sell the stock at a fair price. Thus, investors should always be aware of the bid-ask spread when trading stocks.