What Is a Bid-Ask Spread? (2024)

A bid-ask spread is the amount by which the ask price exceeds the bid price for an asset in the market. The bid-ask spread is essentially the difference between the highest price that a buyer is willing to pay for an asset and the lowest price that a seller is willing to accept.

An individual looking to sell will receive the bid price while one looking to buy will pay the ask price.

Key Takeaways

• A bid-ask spread is the difference between the highest price that a buyer is willing to pay for an asset and the lowest price that a seller is willing to accept.
• The spread is the transaction cost. Price takers buy at the ask price and sell at the bid price, but the market maker buys at the bid price and sells at the ask price.
• The bid represents demand and the ask represents supply for an asset.
• The bid-ask spread is the de facto measure of market liquidity.

See Also

Why The Highest Offer Doesn’t Always Win

What does a bid/ask spread tell you?

A bid-ask spread is the amount by which the ask price exceeds the bid price for an asset in the market. The bid-ask spread is essentially the difference between the highest price that a buyer is willing to pay for an asset and the lowest price that a seller is willing to accept .

What is the best bid/ask spread?

This can be calculated by using the lowest Ask Price (best sell price) and highest Bid Price (best buy price). The Bid-Ask Spread is one of the important trading points in the derivatives market and traders use it as an arbitrage tool to make little money by keeping a check on the ins and outs of Bid-Ask Spread .

What happens if bid is higher than ask?

When the bid volume is higher than the ask volume, the selling is stronger, and the price is more likely to move down than up. When the ask volume is higher than the bid volume, the buying is stronger, and the price is more likely to move up than down .

Understanding Bid and Ask

In essence, bid represents the demand while ask represents the supply of the security. For example, if the current stock quotation includes a bid of $15 and an ask of $15.20, an investor looking to purchase the stock would pay $15.20. An investor looking to sell the stock would sell it at $15.