What Is the Bid-Ask Spread? How It Works in Trading

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The bid-ask spread is the difference between the highest price a buyer is currently willing to pay for an asset (the bid) and the lowest price a seller is currently willing to accept (the ask, also called the offer). If a currency pair is quoted at 1.1000 bid and 1.1002 ask, the spread is 0.0002. A trader who buys pays the ask, a trader who sells receives the bid, and the gap between the two is a cost paid on every trade, separate from any commission.

Bid, ask and who sets them

Every quote has two sides because every trade has two roles. One party wants to trade right now and accepts an existing price: the price taker. The other party has already posted a price and waits for someone to accept it: the liquidity provider, which can be a market maker, a dealer, a bank, or simply another trader with a resting limit order.

• Bid: the highest price at which someone is standing ready to buy. If you want to sell immediately, this is the price you get.
• Ask (offer): the lowest price at which someone is standing ready to sell. If you want to buy immediately, this is the price you pay.

“Bid vs. offer” and “bid vs. ask” describe the same thing; “bid-offer spread” is the term used more often in bond and interbank markets, while “bid-ask spread” is common in equities and retail forex.

The quotes come from the orders and prices that liquidity providers post. In an exchange order book, the best bid is the highest resting buy limit order and the best ask is the lowest resting sell limit order. In dealer markets such as retail forex or most bond trading, the dealer or broker streams its own two-way price, often built from prices it receives from banks and other liquidity providers.

The single “price” shown on charts, tickers and headlines may be the bid, the last traded price or the midpoint, depending on the platform. On many forex platforms the chart line is drawn from the bid, so a buyer’s actual entry price sits above the line by the size of the spread.

How the bid-ask spread works

When a buyer places a market order, it fills against the best ask. When a seller places a market order, it fills against the best bid. Accepting the other side’s posted price is called crossing the spread, and it is the main way spreads turn into a cost for traders and revenue for the firms quoting prices.

Over a full round trip, a trader buys at the ask and later sells at the bid. If the market does not move in between, the trader still loses the full spread: a new long position starts in the red by the spread amount, and the bid has to rise by that amount just to break even. The same holds for a short, which sells at the bid and buys back at the ask.

The spread can close or shift in several ways:

• A buyer raises their bid toward the ask, or a seller lowers their ask toward the bid, narrowing the gap.
• Buyers lift the offer: aggressive buy market orders consume the sell orders at the best ask, and if they exhaust that level, the best ask moves up to the next resting order.
• Sellers hit the bid: aggressive sell orders consume buy orders at the best bid, pushing the best bid lower once that level is used up.

Market orders, limit orders and where they sit

A buy limit order is a bid: you state the most you will pay, and if your price is below the current ask, the order rests on the bid side until a seller comes to you. A sell limit order is an offer resting on the ask side. With a limit order you provide liquidity rather than paying the spread on entry, but the order may never fill if the price does not reach it.

A buy limit order executes right away only if it is at or above the current ask; setting it at the chart price, which may be the bid, can leave it unfilled. Market orders guarantee execution but not price, and they are riskiest when the spread is wide or changing quickly.

Calculating the bid-ask spread

The basic formula is simple:

Spread = Ask price − Bid price

Several related measures make spreads comparable across assets with very different prices.

Midpoint (mid price): Mid = (Bid + Ask) / 2

The midpoint is often treated as the reference for fair value at that moment.

Percentage spread: Percentage spread = (Ask − Bid) / Ask × 100

The ask is a customary denominator; some analysts divide by the midpoint instead, which gives a slightly different figure. Either way, the percentage lets you compare a $0.05 spread on a $50 stock with a $0.05 spread on a $5 stock, where the second is ten times more expensive in relative terms.

Effective spread: the quoted spread shows the prices posted at the top of the book, but your order may not fill there. The effective spread measures what you actually paid relative to the midpoint at the time you traded:

Effective half-spread = |Execution price − Midpoint|

It is often doubled to make it comparable with the quoted spread. If your buy order fills inside the quoted spread (price improvement), the effective spread is smaller than the quoted one. If it fills beyond the best ask because the order was larger than the size available at that price, the effective spread is larger.

Spreads in pips (forex)

In forex, spreads are quoted in pips. For most pairs a pip is the fourth decimal place (0.0001); for pairs quoted against the Japanese yen it is the second decimal place (0.01). Many brokers quote one extra digit, a fractional pip or “pipette.”

Spread in pips = (Ask − Bid) / Pip size

The cash cost depends on position size and the pip value. For a pair quoted in US dollars, such as EUR/USD, one pip on a standard lot of 100,000 units is worth $10, on a mini lot (10,000) $1, and on a micro lot (1,000) $0.10.

Worked examples

Hypothetical stock example. A stock is quoted at $50.00 bid and $50.05 ask.

• Spread: $50.05 − $50.00 = $0.05
• Percentage of ask: $0.05 / $50.05 ≈ 0.10%
• A trader buying 100 shares at the ask pays $5,005. If the trader sold immediately at the bid, they would receive $5,000. The spread cost on that round trip is 100 × $0.05 = $5.

Hypothetical forex example. EUR/USD is quoted at 1.10000 bid and 1.10015 ask.

• Spread: 0.00015, which is 1.5 pips
• Cost on one standard lot: 1.5 × $10 = $15
• Cost on one micro lot: 1.5 × $0.10 = $0.15

The standard-lot position is down $15 the moment it fills, and the bid must rise 1.5 pips to break even, before any separate commission.

Hypothetical illiquid asset. A small, thinly traded stock is quoted at $4.90 bid and $5.00 ask. The spread is $0.10, or 2% of the ask. A round trip costs 2% of the position before the price moves at all, compared with about 0.10% in the first example. A strategy that targets 3% moves would give up two-thirds of each winning move to the spread on this stock.

What determines bid-ask spreads

The spread reflects how much competition exists to provide prices and how much risk the providers believe they are taking.

• Liquidity and volume: when many participants trade at or near the current price, competing quotes push the best bid and ask together, and providers can turn over inventory quickly. Major currency pairs often have spreads in fractions of a pip, while small-cap stocks can carry spreads of 1% to 2% of the price. Volume is an imperfect proxy: a short burst of volume in an illiquid stock does not make its spread reliably tight.
• Volatility: when prices can move quickly, a dealer who buys at the bid may be unable to sell at the ask before the market drops, so spreads often widen as volatility rises.
• News and time of day: spreads can widen around central bank decisions or major economic data and during quieter hours. In forex, session hand-offs and the period around the daily rollover are often thinner, while the busiest hours tend to bring narrower spreads.
• Asset class: options and futures can have spreads that are a much larger percentage of their price than forex or large-cap stocks. Option prices can change sharply in percentage terms for a small move in the underlying, and many strikes and expiries trade thinly.
• Market structure: electronic markets with many competing participants tend to produce tighter spreads than over-the-counter markets with fewer participants. Most bonds trade over the counter through dealers and a given issue may trade infrequently, so many bonds have wider bid-offer spreads than actively traded stocks.

Why market makers profit from the spread

A market maker continuously quotes both sides of the market, standing ready to buy at the bid and sell at the ask. If it buys from one customer at the bid and sells to another at the ask, it keeps the difference. This is why brokers and dealers describe part of their revenue as coming from customers crossing the spread.

That income is payment for taking on risks:

• Inventory risk: between buying from one client and selling to another, the market maker holds a position that can lose value. It adjusts its quotes based on how much inventory it holds, for example lowering both bid and ask to encourage buyers when it is holding too much of an asset.
• Information risk: some counterparties trade because they know or expect something the market maker does not. Wider spreads help offset losses to better-informed traders.
• Volatility risk: in fast markets, quotes go stale quickly. Market makers widen spreads or reduce the size they quote to protect themselves.

Competition limits how wide they can go: when several market makers compete for the same order flow, each has an incentive to post a slightly better bid or ask, which narrows the spread.

Spread-based arbitrage

Spreads can create arbitrage opportunities when prices for the same asset differ across venues. Suppose, hypothetically, a stock shows a bid of $100 on one exchange and an ask of $99 on another because of a time lag. A trader could buy at $99 and sell at $100, locking in $1 per share before transaction costs. Such gaps close quickly, so this kind of arbitrage is generally automated.

Using the spread when deciding what and how to trade

The spread does not tell you whether an asset is a good buy. It tells you what it costs to get in and out, and how easily you can do it. That makes it useful in a few practical ways.

Compare cost with your expected move. There is no universal threshold for a spread that is “too wide.” A spread trivial for a long-term investor can be decisive for a scalper aiming for a few pips. Divide the round-trip spread by the profit target: in the illiquid stock example, a 2% spread consumed two-thirds of a 3% target but would take a much smaller share of a 30% one.

Choose the order type. When the spread is tight and stable, a market order usually fills close to the quote. When it is wide or jumping around, a limit order lets you set the exact price you will accept rather than taking whatever is offered.

Account for the spread in stop placement. On many forex platforms, a long position closes at the bid and a short at the ask, so a sell stop-loss on a long triggers when the bid reaches your level and a buy stop on a short triggers when the ask does. If the spread widens sharply around a news release, the ask can touch a short’s stop even though the bid on the chart never got there. A stop only a fraction of a pip beyond the spread can be triggered by normal spread fluctuation. Base the stop on your trade idea and risk, treating the spread as the minimum distance the price must travel.

Watch for widening as a warning sign. A suddenly wider spread signals that liquidity providers see more risk or that fewer of them are quoting. In leveraged trading, the spread also affects your floating loss from the moment you open, which feeds into margin levels; a sharp widening during a volatile period can push an already stretched account closer to a margin call.

Limitations of the bid-ask spread

The quoted spread is a useful snapshot, but it leaves several things out.

• Top-of-book only: the best bid and ask may be available only for a small size, so a larger order’s real cost is better measured by the effective spread.
• Not the whole cost: commissions, exchange fees and overnight financing are charged separately. A raw spread plus commission and a wider spread with no commission can cost about the same; add both pieces to compare.
• It changes: the spread during busy hours can differ sharply from the one in a quiet session or around a major release. Variable spreads move with conditions; fixed spreads are set by the broker but can come with other conditions.
• No direction signal: a narrow spread, or a large resting order on one side, says nothing about where the price will move.

Bid-ask spread vs. related terms

Several concepts share the word “spread” or get mixed up with it.

• Spread in trading (general): “spread” can also mean a strategy that combines two positions, such as an options vertical spread or a calendar spread in futures. Those are positions, not the gap between bid and ask, although each leg still has its own bid-ask spread.
• Credit and yield spreads: a yield spread is the difference between yields on two bonds, such as a corporate and a government bond of similar maturity. It is a valuation measure, separate from the bid-offer spread that sets your trading cost in the bond.
• Slippage: slippage is the difference between the price you expected and the price you got. It can come from the market moving between order and fill or from the spread widening. The spread is visible before you trade; slippage is measured after.
• Commission: a commission is an explicit fee. The spread is an implicit cost built into the prices you trade at.

FAQs

The Bottom Line

The spread matters most to short-term traders such as scalpers, whose small profit targets can be eaten up by entry and exit costs, and to anyone trading thin markets. Divide the round-trip spread by your profit target, use limit orders when spreads are wide or jumping, and add commissions and financing to the spread when comparing the real cost of trading.