The bid-ask spread is the gap between the highest price a buyer offers and the lowest price a seller accepts. Investors effectively encounter this trading cost when they enter or exit a position, even when a broker advertises zero commissions.

The spread changes with liquidity, volatility and order size. Understanding it helps investors compare execution quality before placing a trade.

How the bid-ask spread works

Investor.gov defines the bid as the highest price a buyer will pay for a specified number of shares. The ask is the lowest price at which a seller will sell, and the difference between those quotes is the spread.

Suppose a stock shows a $49.90 bid and a $50.00 ask. The quoted spread is $0.10, or 0.2% of the ask price, before commissions or other charges.

A buyer using a market order usually trades near the ask, while an immediate seller usually receives a price near the bid. Fusion Market News explains the execution trade-off in its guide to how limit orders work.

Why the bid-ask spread changes

Liquidity is the main driver. A heavily traded security with many competing orders can maintain a narrow gap, while a thin market may require buyers and sellers to move farther apart before they agree.

FINRA notes that illiquid investments often carry wider spreads, which can reduce returns by raising the purchase price or lowering the sale price. Spreads may also widen during market stress, outside regular hours or after news increases uncertainty.

Order size matters because the best displayed quote may cover only a limited number of shares. A large market order can consume several price levels, producing an average execution price worse than the initial quote.

The visible spread also does not show the full depth of the order book. Several buy and sell quotes can sit behind the best prices, so investors should review available volume when their order is large relative to normal trading activity.

Different securities have different natural spread ranges. Large-company shares and heavily traded exchange-traded funds often attract more competing quotes, while small-company stocks, bonds and less active funds may trade with larger gaps.

How investors can manage spread costs

Investors can compare the spread as a percentage of the security’s price rather than looking only at cents. A $0.10 spread is minor on a $500 stock but substantial on a $2 stock.

A limit order sets the worst acceptable price and can prevent an unexpected execution. However, it does not guarantee a trade, especially when prices move quickly or available volume is small.

ETF investors should also compare trading spreads with the fund’s expense ratio and underlying liquidity. The Fusion Market News guides to ETF creation and redemption and implied volatility provide related context, while Investor.gov and FINRA describe the underlying market mechanics.

Sharron Kendi is a seasoned crypto market analyst and writer with over three years of experience decoding blockchain trends, price movements, and market dynamics. She holds a Bachelor’s Degree in Commerce (Finance) from Kenyatta University, blending a solid academic foundation with a sharp eye for technical analysis and a deep understanding of on-chain data. Her work delivers clear, data-driven insights that empower investors to navigate the fast-evolving digital asset space with confidence.