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Bid-Ask Spread

The bid-ask spread is the difference between the bid price (the highest price a buyer is willing to pay for an asset) and the ask price (the lowest price a seller is willing to accept). This spread is a key indicator of the liquidity and efficiency of a market. A narrow bid-ask spread typically indicates a highly liquid market with many buyers and sellers, while a wider spread suggests lower liquidity and higher transaction costs. The bid-ask spread is also a source of profit for market makers, who buy at the bid price and sell at the ask price.

Example

If a stock has a bid price of $100 and an ask price of $101, the bid-ask spread is $1. A narrow spread like this is common in highly liquid stocks.

Key points

• Represents the difference between the highest bid price and the lowest ask price.

• Indicates market liquidity and transaction costs.

• Narrow spreads suggest high liquidity, while wide spreads indicate lower liquidity.

Quick Answers to Curious Questions

It indicates high liquidity and lower transaction costs, meaning the market has many buyers and sellers.

Market makers buy at the bid price and sell at the ask price, earning the spread as profit.

It affects transaction costs and the ease with which trades can be executed, especially in less liquid markets.

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