When you buy or sell a stock, your trading screen shows two prices: the bid and the ask. The difference between them is the bid-ask spread, one of the less obvious costs of trading.
What is the bid-ask spread?
The bid is the highest price a buyer is currently willing to pay for a stock. The ask is the lowest price a seller is currently willing to accept. The difference between them is the spread.
Think of it like exchanging currency at an airport. The exchange service offers one price to buy your currency and another to sell it. Stock markets work in a similar way.
A simple example
Imagine you’re looking at a stock with these prices:
If you immediately buy 100 shares at $50.10, you would pay $5,010. If you immediately sell those shares at $49.90, you would receive $4,990.
That’s a $20 difference, even though the quoted prices haven’t changed.
This simplified example assumes both prices are available for all 100 shares and excludes fees.
Why it matters
Stocks with heavy trading activity often have narrower spreads because many buyers and sellers are competing. Less actively traded stocks may have wider spreads, making it more expensive to enter or exit a position quickly.
This is especially important for investors trading smaller companies, less popular exchange-traded funds (ETFs), or stocks experiencing unusual volatility.
The important part: you can set your price
Using a limit order can help you control the price you’re willing to pay or accept, although your order may not execute.
One thing to remember
A stock’s displayed price isn’t always the price you’ll actually pay or receive.
Before placing a trade, take a moment to check the bid and ask. A small difference might not seem important, but repeated trading costs can add up over time.
Try it yourself: open the Profit & Loss Calculator and enter an entry price of $50.10, an exit price of $49.90 and 100 shares. It shows a $20 loss, which is the cost of crossing the spread once in each direction.
Stay sharp, stay organized.
Educational content, not personalized investment advice. The prices in the example are hypothetical.
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