Definition
The bid-ask spread is the difference between what buyers are willing to pay (bid) and what sellers are willing to accept (ask). It represents an implicit transaction cost for traders and the profit margin for market makers. Tight spreads indicate high liquidity and active trading, while wide spreads suggest lower liquidity or higher volatility. The spread varies throughout the trading day and tends to widen during market stress or for less liquid securities.
Formula
Example
A stock with a $50.00 bid and $50.05 ask has a $0.05 spread (0.1%). A less liquid stock might have a $50.00 bid and $50.50 ask, a $0.50 spread (1%), meaning higher trading costs.
FAQ
What is Bid-Ask Spread?
The difference between the highest bid price and lowest ask price for a security.
How do you calculate Bid-Ask Spread?
A common formula for Bid-Ask Spread is: 买卖价差 = 卖出价 - 买入价 价差百分比 = (卖出价 - 买入价) / 卖出价 x 100
Why is Bid-Ask Spread important?
Bid-Ask Spread helps investors evaluate trading mechanics and make more informed decisions.
Related Terms
Bid Price
The highest price a buyer is willing to pay for a security.
Ask Price
The lowest price a seller is willing to accept for a security.
Liquidity
The ease with which an asset can be bought or sold without significantly affecting its price.
Market Maker
A firm that continuously quotes buy and sell prices for a security, providing liquidity.