Bid-ask spread

The gap between the highest price a buyer will pay and the lowest a seller will accept. A cost paid on every round trip.

Example

Buying at 10.02 and being able to sell only at 9.98 means a 0.40% cost before the price has moved at all.

Important

It is the market's visible price of liquidity: narrow where many people trade, wide where few do, and widest exactly when everyone wants to sell at once.

Related terms

• Transaction cost — What it costs to trade rather than to hold: commission, the spread between buying and selling prices, any tax on the trade itself, and the price movement a large order causes.
• Liquidity — How quickly and cheaply an asset can be converted to cash without moving its own price.
• Illiquidity discount — The reduction in price a seller must accept to find a buyer for something that cannot be readily traded.

Lessons that explain it

• Four risks, an invisible dealing cost, and why interest is often the worst-taxed return — Credit, rates, inflation and liquidity are four separate risks that a single word - safe - is routinely used to dismiss. The tax treatment of interest is the one most holders never price at all. (12 min)
• Many venues, no closing bell, no reference price — The quote is for the next unit, not for your position, and there is no official price anywhere. What valuation models exist for this class are contested in a way that a bond discount or an equity multiple simply is not. (12 min)
• You pay for intrinsic value, time and uncertainty - and time runs out — An option's price has two parts: what it would be worth if exercised now, and extra value for the time and volatility left. That second part shrinks to zero by expiry. (12 min)
• Appraising one position: maximum loss, break-even, cost and what you are really betting on — Before any derivatives trade, write down five numbers. If you cannot fill them in, you are not evaluating a position - you are guessing. (11 min)
• Unlimited loss on the short side, spreads on every trade, and tax rules that vary by contract — Derivatives add risks shares do not have - assignment, margin calls, unlimited short losses - plus higher trading costs and tax treatment that differs by product and country. (13 min)
• Price moves, interest differences and leverage - in a market where one side's gain is the other's loss — Forex returns come from exchange-rate moves and interest-rate differences, magnified by leverage, in a market that is roughly zero-sum before costs and negative-sum after them. (12 min)

All 578 terms in the Investing glossary