The bid–ask spread reflects the cost of trading an asset at any moment. A narrow spread indicates that buyers and sellers are closely aligned on price, which usually signals higher liquidity. A wide spread indicates lower liquidity, reduced activity, or greater uncertainty in the market.
Spreads vary by asset class, time of day, market conditions, and trading volume. Highly traded assets—such as major stocks, currency pairs, and liquid ETFs—tend to have tighter spreads. Less liquid assets may have wider spreads because fewer market participants are placing orders.
The spread also compensates market makers for providing liquidity. They quote both a bid and an ask price and earn the spread when trades occur. This mechanism ensures continuous trading and smoother price discovery.
Understanding the bid–ask spread is important because it directly influences trading costs. Traders evaluate spreads before placing orders to estimate slippage and determine whether execution is efficient.
The bid–ask spread affects transaction costs, liquidity, and execution quality. It is a key factor in determining how efficiently traders can enter or exit positions.
During volatility, uncertainty increases and fewer traders are willing to quote tight prices. This reduces available liquidity and causes spreads to widen as market makers manage risk.
Spreads often tighten during peak trading hours when more participants are active and widen during off-hours when liquidity declines.
Traders may use limit orders, trade during high-liquidity periods, or avoid low-volume assets to reduce spread-related costs.
A stock has a bid price of $50.00 and an ask price of $50.05. The bid–ask spread is $0.05, representing the immediate transaction cost for buying or selling the asset.
