what is a bid ask spread 
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 investopedia zoe hansenunderstanding bid ask spreadsa security s price is the market s perception of its value at any given point in time and is unique to understand why there is a bid and an ask one must factor in the two major players in any market transaction namely the price taker trader and the market maker counterparty market makers many of which may be employed by brokerages offer to sell securities at a given price the ask price and will also bid to purchase securities at a given price the bid price when an investor initiates a trade they will accept one of these two prices depending on whether they wish to buy the security ask price or sell the security bid price the difference between these two the spread is the principal transaction cost of trading outside commissions and it is collected by the market maker through the natural flow of processing orders at the bid and ask prices this is what financial brokerages mean when they state that their revenues are derived from traders crossing the spread the depth of the bids and the asks can have a significant impact on the bid ask spread the spread may widen significantly if fewer participants place limit orders to buy a security thus generating fewer bid prices or if fewer sellers place limit orders to sell as such it s critical to keep the bid ask spread in mind when placing a buy limit order to ensure it executes successfully bid ask spread trades can be done in most kinds of securities as well as foreign exchange and commodities traders use the bid ask spread as an indicator of market liquidity high friction between the supply and demand for that security will create a wider spread most traders prefer to use limit orders instead of market orders this allows them to choose their own entry points rather than accepting the current market price there is a cost involved with the bid ask spread as two trades are being conducted simultaneously bid ask spread calculationthe bid ask spread is calculated as the difference between the highest price that a buyer is willing to pay for a security and the lowest price that a seller is willing to accept mathematically the bid ask spread can be represented as while the basic calculation of the bid ask spread involves pretty simple math more complex calculations may be necessary during dynamic volatile markets there may be more specific things that happen where it s not so straightforward for example in markets with multiple tiers of bids and asks you might calculate a weighted average spread that takes into account the distribution of orders at different price levels you could also lean on the effective spread the effective spread accounts for the impact of market orders this calculation is the difference between the execution price of a market order and the midpoint of the bid ask spread this can be a more accurate reflection of the true cost of trading especially in highly liquid markets you can also convert a bid ask spread to a percentage spread if you re less interested in the actual dollar amount but you want more of a comparative metric for instance if the bid ask spread is 1 and a stock is trading at 50 you may care more about a percentage spread of 2 1 50 as opposed to the nominal amount of 1 bid ask spread and liquiditythe size of the bid ask spread from one asset to another differs mainly because of the difference in liquidity of each asset the bid ask spread is the de facto measure of market liquidity certain markets are more liquid than others and that should be reflected in their lower spreads essentially transaction initiators price takers demand liquidity while counterparties market makers supply liquidity for example currency is considered the most liquid asset in the world and the bid ask spread in the currency market is one of the smallest one hundredth of a percent in other words the spread can be measured in fractions of pennies on the other hand less liquid assets such as small cap stocks may have spreads that are equivalent to 1 to 2 of the asset s lowest ask price bid ask spreads can also reflect the market maker s perceived risk in offering a trade for example options or futures contracts may have bid ask spreads that represent a much larger percentage of their price than a forex or equities trade the width of the spread might be based not only on liquidity but also on how quickly the prices could change placing market orders can be risky when the bid ask spread is shifting or large if you find yourself in this position consider using a limit order to set the exact price you want to exchange at instead of relying on market offerings bid ask spread exampleif the bid price for a stock is 19 and the ask price for the same stock is 20 then the bid ask spread for the stock in question is 1 the bid ask spread can also be stated in percentage terms it is customarily calculated as a percentage of the lowest sell price or ask price for the stock in the example above the bid ask spread in percentage terms would be calculated as 1 divided by 20 the bid ask spread divided by the lowest ask price to yield a bid ask spread of 5 1 20 x 100 this spread would close if a potential buyer offered to purchase the stock at a higher price or if a potential seller offered to sell the stock at a lower price factors that impact the bid ask spreadthere s a bunch of things that drive bid ask spreads the list below may not contain everything but it s a good overview of why bid ask spreads exist and how they may change bid ask spreads and market makerswe ll wrap up this article by touching on market makers market makers do play a part in how bid ask spreads are formulated they are able to make this impact because they 