Bid, Ask and the Spread
Every share has two live prices at once. This lesson explains the bid, the ask, and the spread between them, which is a real cost even when your broker charges no commission.
Why this matters for beginners
The spread is the most commonly ignored trading cost. On widely traded shares it is trivial. On small or foreign listings it can quietly cost more than any commission you were avoiding.
Main explanation
The bid is the highest price a buyer is currently willing to pay. The ask is the lowest price a seller is willing to accept. The difference between them is the spread, and it is the price of instant execution.
If you buy at the ask and immediately sell at the bid, you lose the spread. That is why a position can show a small loss the second it is filled, even though nothing about the company changed.
Spreads are narrow when many people trade a share every second and wide when few do. A large index ETF might quote a spread of a few hundredths of a percent; a tiny listing might quote several percent.
A limit order lets you sit inside the spread and wait rather than paying it. You trade certainty of price for uncertainty about whether the order fills.
Example using a real company
A share quoted 24.90 bid and 25.10 ask has a 0.20 spread, which is 0.8 percent of the price. Buying and instantly selling would cost that 0.8 percent before any commission.
- →Heavily traded ETF: bid 100.01, ask 100.02. The spread costs roughly 0.01 percent of the trade.
- →Thinly traded small company: bid 4.60, ask 4.85. The spread costs roughly 5 percent of the trade.
Common beginner mistakes
- ✕Calling a broker free because there is no commission, while ignoring a wide spread.
- ✕Panicking at a small paper loss that is really just the spread on the first day.
- ✕Trading thin listings at the open, when spreads are usually at their widest.
Key terms
- Bid
- The highest price a buyer is currently offering.
- Ask
- The lowest price a seller is currently accepting.
- Liquidity
- How easily a share can be traded without moving the price.
Key takeaways
- 01The spread is a real cost of trading, separate from commission.
- 02Wide spreads signal low liquidity and deserve a limit order.
- 03A tiny paper loss right after buying is often just the spread, not news.
Check yourself
- 01The spread is a cost even when a broker charges no commission.
- 02A wider spread usually means a share is more heavily traded.
- 03A limit order lets you avoid automatically paying the full spread.
Try the concept on a real company
Compare a broad ETF with a smaller company in the Analyzer. The smaller and less covered the business, the more the spread matters when you actually place the order.
Educational examples only. Not buy or sell recommendations.