Definition
The bid-ask spread is the difference between the highest price buyers are currently willing to pay (the bid) and the lowest price sellers are willing to accept (the ask). It is a cost of trading immediately and a common gauge of liquidity.
How it works
A trader who buys at the ask and sells at the bid pays the spread on a round trip, even if the quoted price does not change. Spreads are usually tighter for actively traded instruments and wider for small, thinly traded or volatile ones, and they can widen sharply around news, market opens and closes.
Spreads can be quoted in price units, in percent of the midpoint, or in basis points, so comparisons across instruments should use the relative figure. Posting a limit order inside the spread may fill at a better price, but it is not guaranteed to execute.
Formula / convention
Spread = ask − bid; relative spread (%) = (ask − bid) ÷ midpoint × 100, where midpoint = (ask + bid) ÷ 2
Illustrative example
Illustrative: a fictional share shows a bid of HK$49.90 and an ask of HK$50.10. The spread is 50.10 − 49.90 = HK$0.20, the midpoint is HK$50.00, and the relative spread is 0.20 ÷ 50.00 = 0.4%. Buying 1,000 shares at the ask and selling them straight away at the bid would lose 0.20 × 1,000 = HK$200 before any fees.
What to watch for
A narrow quoted spread applies only to the size displayed at the best prices, so larger orders may trade at worse levels. The quoted spread can also differ from the effective spread you actually pay.