The bid-ask spread is the difference between what buyers will pay (bid) and what sellers are asking (ask) for an asset.
The Spread
Example:
- Bid price (buy): $100.00
- Ask price (sell): $100.05
- Spread: $0.05
If you buy then immediately sell 100 shares:
- Buy: $10,000.00
- Sell: $10,005.00
- Spread cost: $5.00
Why Spreads Exist
- Market makers facilitate trades
- Larger spreads = less liquid stocks
- Tighter spreads = more liquid stocks
Spread examples:
- Large cap stocks (Apple, Microsoft): $0.01-0.05
- Small cap stocks: $0.10-$1.00+
- Illiquid stocks: $1.00+ spreads
Impact on Trading
Day trading costs:
- Frequent traders pay spread repeatedly
- 100 trades × $0.05 spread = $5 cost
- Plus commissions (if any)
Long-term investors:
- Single buy/sell spread cost minimal
- Amortized over years
- Focus on fundamentals, not spread
Minimizing Spread Impact
- Trade liquid stocks (large cap, ETFs)
- Use limit orders (not market orders)
- Trade during market hours (tighter spreads)
- Avoid wide bid-ask stocks
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