The bid-ask spread is the difference between the highest price a buyer is willing to pay for an asset and the lowest price a seller is willing to accept. It represents the cost of executing a trade and serves as the primary source of profit for market makers who provide liquidity to the exchange.
For example, if a stock has a bid price of $100.00 and an ask price of $100.05, the spread is $0.05. When you buy at the market, you pay the ask price. When you sell at the market, you receive the bid price. The spread acts as a transaction cost that you pay immediately upon entering a position.
Spreads fluctuate based on market conditions. Highly liquid assets, such as major currency pairs or large-cap stocks, typically have narrow spreads of a few cents or pips. Illiquid assets often have wider spreads because fewer participants are trading them. High volatility can also cause spreads to widen rapidly as market makers adjust for increased risk. Always remember that trading involves significant risk, and transaction costs like the bid-ask spread can impact overall profitability, especially for frequent traders.
How this answer was produced
AI-assisted draft, human-reviewed by AlphaScala editorial against our standards before publication. General education, not advice for your specific situation.