Finance Glossary

Bid-Ask Spread

Bid-Ask Spread

 

bid-ask spread for a stock is the difference between the ask price offered by the seller and the bid price offered by the buyer. It is also called simply the “bid-ask” or the “sell spread.” To give an example, a seller might ask $5 for a stock, while the buyer bids only $4. The bid-ask spread in this instance would be $1. The bid-ask may also be expressed as a percentage, which in the above case would be 20% since $1 is 20% of the ask price of $5. Though in a day of trading, many bid and ask prices will be negotiated, the bid-ask data is typically calculated using the lowest ask price and the highest bid price offered. To put it in other terms, the bid represents demand for the stock, while the ask represents supply.

Bid-ask spread is important for determining the liquidity of an asset, meaning how fast it can be turned into cash. Assets with high liquidity such as currency will have a very low bid-ask in fractions of cents. On the other hand, an asset with low liquidity such as a small-cap stock, will typically have a higher bid-ask, generally in the 1-2% range.

 

 

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