Bid vs Ask: Understanding the Spread
Learn the two prices that determine what you actually pay when buying or selling stocks.
Quick Answer
The bid is the highest price a buyer will pay. The ask (or offer) is the lowest price a seller will accept. The difference is the spread—basically the cost of trading. Example: Apple shows Bid $180.00 / Ask $180.05. You buy at $180.05, sell at $180.00. The $0.05 spread is the "transaction cost" even before commissions.
Visual Breakdown
BID (Buyers)
$180.00
What buyers are willing to pay
This is what YOU receive when selling
ASK (Sellers)
$180.05
What sellers are asking for
This is what YOU pay when buying
SPREAD
$180.05 - $180.00 = $0.05
The spread is the difference between bid and ask. It's essentially a built-in transaction cost.
Real Trading Example
Scenario: You want to day trade Tesla
You BUY 100 shares (market order):
100 × $200.10 = $20,010
You SELL immediately (market order):
100 × $200.00 = $20,000
Instant loss: $10
Even if the price didn't move, you lost $10 due to the spread! Stock must move $0.10 (0.05%) just to break even.
Tight Spreads vs Wide Spreads
✓ Tight Spread (Good)
Apple (AAPL): Bid $180.00 / Ask $180.01
Spread: $0.01 (0.006%)
Highly liquid stock, millions trading daily. Easy to enter/exit with minimal cost.
✗ Wide Spread (Bad)
Penny Stock XYZ: Bid $0.50 / Ask $0.60
Spread: $0.10 (20%!)
Illiquid stock, low volume. Stock must rise 20% just to break even! Avoid trading these.
Why Spreads Vary
1. Liquidity (Volume)
High volume stocks (Apple, Tesla) = tight spreads ($0.01-0.05). Low volume stocks = wide spreads ($0.10-1.00+).
2. Volatility
Stable stocks = tighter spreads. Volatile stocks = wider spreads (market makers need protection from rapid price swings).
3. Time of Day
Market hours (9:30am-4pm) = tighter spreads. Pre-market/after-hours = wider spreads (less liquidity).
4. Market Conditions
Calm markets = tight spreads. Crisis/panic = spreads widen (March 2020 COVID crash had 5-10x normal spreads).
How to Minimize Spread Costs
- ✓Trade liquid stocks: Stick to high-volume stocks with tight spreads
- ✓Use limit orders: Set your own price instead of accepting the ask
- ✓Trade during regular hours: Avoid pre-market/after-hours when spreads widen
- ✓Avoid the open: First 15 minutes have wider spreads; wait until 9:45am
- ✓Check spread before trading: Wide spread? Consider a different stock
Common Questions
Why do market makers keep the spread?
Market makers provide liquidity—they're always ready to buy or sell. The spread is their profit for taking the risk of holding inventory. Competitive markets keep spreads small; illiquid markets have wider spreads.
Can I buy at the bid price?
Yes, with a limit order. Place a buy limit at the bid price ($180.00). You might get filled if someone accepts your bid, but there's no guarantee. You're essentially trying to save the spread.
What's a good spread percentage?
Under 0.1% is excellent. 0.1-0.5% is acceptable. Over 1% is expensive—only trade if you have strong conviction. Calculate: (Ask - Bid) ÷ Ask × 100 = spread %
Key Takeaways
- ✓Bid = highest price buyers will pay; Ask = lowest price sellers accept
- ✓You buy at the ask, sell at the bid—spread is built-in transaction cost
- ✓Tight spreads ($0.01-0.05) = liquid stocks, easy trading
- ✓Wide spreads (1%+) = illiquid stocks, expensive to trade
- ✓Use limit orders and trade during regular hours to minimize spread costs