Bid-ask spread

The bid-ask spread is the difference between the highest price a buyer is currently willing to pay for an asset (the bid) and the lowest price a seller is currently willing to accept (the ask). It is, in effect, the price of immediacy: a buyer who wants to deal at once pays the ask, and a seller who wants to deal at once receives the bid. Spreads are generally narrow in heavily traded markets, where competition between many buyers and sellers pushes the two prices together, and wide in thinly traded ones.

A worked example

Suppose a hypothetical share is quoted with a bid of 99 pence and an ask of 101 pence. The spread is 2 pence. A trader who bought at the ask and sold again immediately at the bid would pay 101 pence and receive 99 pence, giving up 2 pence per share — roughly two per cent — with the market itself unmoved.

The spread does not say whether a price is high, low or likely to change. It measures only the current cost of crossing between buyer and seller, and it applies only to the sizes quoted; a large order can move the price well beyond it.