Spread
The gap between the bid and ask price. A tighter spread means lower transaction costs and better liquidity.
Formula
Spread = Ask Price − Bid Price
The spread is the difference between the ask price and the bid price of a security. It represents the immediate cost of executing a round-trip trade (buy then sell) at market price.
Spread = Ask − Bid. A stock quoted at $99.95 bid / $100.05 ask has a $0.10 spread. On a 100-share trade, you immediately lose $10 to the spread on a round trip.
Spreads narrow when there is high liquidity and many competing market makers. Thinly traded securities, penny stocks, and assets in volatile conditions have wider spreads. Professional traders minimize spread costs by using limit orders.
Example
EUR/USD might have a 0.5 pip spread ($0.00005) in normal conditions — extremely tight. A small-cap stock might have a $0.20 bid-ask spread on a $5 stock, which is a 4% round-trip cost before the price even moves.
Related Terms
Ask Price
The lowest price a seller is willing to accept right now. You buy at the ask.
BeginnerBid Price
The highest price a buyer is willing to pay for a security right now. You sell at the bid.
BeginnerBroker
An intermediary who executes buy and sell orders on your behalf. Modern brokers are typically electronic platforms.
BeginnerLiquidity
How easily you can enter or exit a position without moving the price. High liquidity = tight spreads, deep order books, fast fills.
BeginnerVolume
Total number of shares (or contracts) traded in a given period. Volume confirms price moves — no volume, no conviction.
Beginner