The bid-ask spread is the price difference between the bid price and the ask price for a security.
Bid vs ask price - What's the difference?
The bid is the price a buyer is willing to pay for a security, and the ask is the price a seller is willing to sell a security. A bid-ask spread is the difference between the highest price a buyer will pay for a security and the lowest price a seller will sell. The bid-ask spread always displays the best price available for buyers and sellers.
The highest bid price and the lowest ask price are displayed. The bid-ask spread is the difference between the two prices.
The mid-price is the price exactly halfway between the bid and ask.
For example, if the bid price is $2.50 and the ask price is $2.60, the spread is $0.10, and the mid-price is $2.55.
The bid-ask spread is often quoted as a percentage of the mid-price rather than a dollar amount. For example, if the bid price is $2.50 and the ask price is $2.60, the spread is 10 basis points or 0.10%.
Tight bid-ask spreads occur in liquid markets.
The bid-ask spread can be an important factor in determining whether to buy or sell a security. It is also a measure of market liquidity, showing how much buyers and sellers are willing to trade at different prices. A wide bid-ask spread may indicate that there are not many buyers and sellers in the market or that they are not willing to trade at the current prices.
The bid-ask spread can be a significant cost of trading, especially in illiquid markets.
The bid-ask spread is not the only cost of trading. There are also commissions and fees, which can vary depending on the broker and the type of security being traded.
The bid-ask spread is just one factor to consider when determining the total cost of trading a security.