What’s the Bid Ask Spread?
The bid ask spread is just the gap between what buyers want to pay and what sellers want for a security. It’s basically a trading cost and a quick way to gauge how easily you can buy or sell something.
Breaking Down the Basics
At its core, the bid ask spread is the difference between the bid price and the ask price for any financial security. You’ll find it everywhere: stocks, bonds, options, currencies—you name it.
This spread is a cost you pay to trade. If you want to buy or sell right now, you have to cross this gap. Market makers make their living off that difference.
Some key things about bid ask spreads:
- They’re everywhere in finance
- Measured in dollars or percent
- Show how easy it is to trade (liquidity)
- Change all day as trading happens
Narrow spreads mean there’s lots of trading and it’s easy to get in or out. Wide spreads? Not so much. The spread is the price you pay for instant trades.
Bid Price vs. Ask Price
The bid price is the most any buyer will pay.
The ask price is the least any seller will take.
If you want to buy right now, you pay the ask.
If you want to sell instantly, you get the bid.
The ask is always a bit higher than the bid—no surprises there.
Quick example:
- Bid: $19.50
- Ask: $19.75
- Spread: $0.25
Market makers post both prices. They buy at the bid, sell at the ask, and that’s how they make money. This keeps trading moving—there’s always a price on the board.
Competition between market makers keeps spreads from getting out of hand.
How to Figure Out the Spread
It’s easy math. Subtract the bid from the ask and you’ve got the spread.
Simple formula:
Bid Ask Spread = Ask Price – Bid Price
Want to compare spreads across different stocks? Use percentages: divide the spread by the ask, multiply by 100, and there you go.
Percentage formula:
Percentage Spread = (Spread ÷ Ask Price) × 100
How the Bid Ask Spread Works in Real Markets
The bid ask spread is the backbone of trading. Buyers, sellers, and market makers all play their part. Orders go through exchanges, and the spread hits your profits and losses directly.
Buyers, Sellers, and the Spread
Buyers and sellers set the stage by naming their prices. The bid is the highest buyers will pay; the ask is the lowest sellers will take.
If you’re in a hurry to buy, you pay the ask. Want to sell fast? You get the bid. That’s the spread in action.
You’ll never see buyers and sellers meet perfectly in the middle. That gap? It’s where market makers step in to make trades happen.
Supply and demand move these numbers. More buyers push bids up, more sellers push asks down. When lots of folks want to trade, the spread shrinks.
Big orders can shake things up. A huge buyer might bump the ask higher. A big seller can drag the bid down.
Market Makers: Keeping Things Liquid
Market makers keep trading smooth by always quoting prices to buy and sell. They’re not guessing which way prices go—they just work the spread.
They buy at the bid, sell at the ask, and pocket the difference for taking on risk and holding inventory. That’s their paycheck for making sure you can trade instantly.
Electronic market makers use fast algorithms to change prices as the market moves. They fight each other to post the best prices and pull in more trades.
In busy markets, market makers keep spreads tight because they can trade a lot with less risk. When things get wild or slow, they widen spreads to protect themselves.
Brokers shop around with different market makers to get the best deals for clients. All that competition helps keep spreads from getting too wide.
Order Types and How They Affect the Spread
Your order type matters. It decides how you interact with the spread—and what price you get.
Market orders go through right away at whatever the current bid or ask is. Buyers pay the ask, sellers get the bid. You get a trade, but not always the price you hoped for.
Limit orders let you name your price. If you want to buy, you set a price below the current ask and wait. If the market comes to you, you get filled.
Limit orders can help dodge wide spreads. You pick your entry or exit, instead of just taking what’s there.
Big orders can run through several price levels if there’s not enough volume at the best price. That can mean worse prices for you.
Electronic exchanges match orders automatically, giving priority to the best prices and whoever got there first.
What Makes the Bid Ask Spread Wider or Tighter?
Lots of things can make spreads wider or tighter. Liquidity and volume are the big ones, but volatility and market mood matter too—especially when things get unpredictable.
Liquidity and Volume: The Big Drivers
Liquidity is just how easy it is to trade without moving the price much. More liquidity means tighter spreads, since everyone’s fighting to trade at similar prices.
High volume keeps spreads tight. Stocks with tons of trades each day usually have tiny spreads—market makers don’t have to worry about getting stuck with inventory.
Market depth is about how many shares are waiting at each price. If there’s a big stack at both bid and ask, spreads stay tight. Thin order books mean wider spreads, since traders want more for taking the risk.
Big-name stocks like Apple or Microsoft? Spreads are often just a penny. Small companies? The spreads can be a lot wider because fewer people are trading.
Volatility and What’s Going On in the Market
Volatility makes market makers nervous, so they widen spreads to cover wild price swings. Around earnings or during crazy market days, spreads can jump from pennies to dollars in no time.
When nobody knows where prices are headed, spreads get bigger. Uncertainty means market makers want more wiggle room.
Options and other complicated stuff really show this. When things get jumpy, spreads on those can get huge because pricing gets tricky.
Big economic news—like Fed announcements or jobs reports—can blow spreads wide open until everyone figures out what’s going on.
