Bid, Ask, and the Spread

Why this matters

The price you see quoted for a stock isn't exactly the price you'll pay, or the price you'd get if you sold. That small gap is easy to ignore on one trade. Across many trades, or in less active stocks, it adds up to a real cost, and understanding it will make you a more careful buyer and seller.

Two prices at once

At any moment in a trading day, there are people who want to buy a stock and people who want to sell it, each at the price they're willing to accept.

• The bid is the highest price any buyer is currently willing to pay.
• The ask is the lowest price any seller is currently willing to accept.
• The difference between them is the bid-ask spread.¹

If you place an order to buy right away, you'll generally pay around the ask. If you place an order to sell right away, you'll generally receive around the bid.² The ask is always higher than the bid, so an immediate buy-then-sell loses money even if the price doesn't move at all.

	STU Corp (widely traded)	Small Co (thinly traded)
Bid	$49.95	$9.80
Ask	$50.05	$10.20
Spread	$0.10	$0.40
Spread as a share of the price	0.2%	4%
Buy about $5,000, then sell immediately	Lose $10	Lose $200

Both companies are fictional. Buying 100 shares of STU Corp at $50.05 costs $5,005, and selling them straight back at $49.95 returns $4,995. Buying 500 shares of Small Co at $10.20 costs $5,100, and selling at $9.80 returns $4,900. Same idea, but the thinly traded stock costs twenty times as much to get in and out of.

Liquidity and volume

Why are some spreads tiny and others wide? It mostly comes down to how actively a stock is traded.

Volume is the number of shares that change hands over a period, such as a day. Liquidity is how easily you can buy or sell quickly at a fair price without moving that price much. Stocks with high volume tend to have many buyers and sellers competing at every moment, which pushes the bid and ask close together. When few people are trading, the gap can widen, and there may be fewer shares available near the quoted prices.

The same thing happens across time: outside regular trading hours, when fewer people are active, spreads usually widen.³

Quoted prices and size

A bid or ask applies to a certain number of shares. If you want to buy more than the sellers at the ask are offering, the rest of your order may fill at higher prices. For large, busy stocks and small orders, this rarely matters. For thinly traded stocks, even a modest order can move the price against you.

Key takeaways

• The bid is the best price a buyer will pay. The ask is the best price a seller will accept.
• You typically buy near the ask and sell near the bid, so the spread is a cost on every round trip.
• Heavily traded stocks tend to have narrow spreads. Thinly traded stocks, and trading outside regular hours, tend to have wider ones.
• Larger orders in less liquid stocks can move the price against you.

Check your understanding

A stock's bid is $24.90 and its ask is $25.10. You buy 200 shares and sell them a minute later at the same quotes. Roughly how much did the spread cost you?

1. $20
2. $40
3. Nothing, because the price didn't change.

Which stock is most likely to have the widest spread?

1. A small company whose shares trade only a few thousand times a day.
2. A large company whose shares trade millions of times a day.
3. They'd all have the same spread.

What's next

Bids and asks change constantly. The next lesson, Why Prices Move, looks at what actually pushes a stock's price up or down.