How Markets Work · Beginner · 5 min

Bid, ask, spread

You can calculate the spread in price and in percent, find the mid price and estimate how far a price must move before a trade breaks even.

Every trade starts behind

Buy a share and sell it again one second later, with no price change at all. You still lose money. Not because of a fee, but because of the gap between the price buyers pay and the price sellers get.

You met that gap in the Start Here rubric. This lesson makes it measurable: how to compare spreads between markets, what makes them widen, and how much a price has to move before a trade is even back to zero.

Measuring the gap

Three numbers describe the top of the order book:

The bid, the highest price a buyer is offering right now.
The ask, the lowest price a seller is accepting right now.
The mid price, halfway between the two. Many charts and data providers use it as the fair price of the moment.

The spread in money tells you little on its own. A spread of 0.02 is tiny on a share that costs 100, but large on one that costs 0.50. That is why traders measure it in percent of the mid price: spread ÷ mid price.

Spreads are not fixed. They usually widen when:

big news is released or expected,
few people trade the asset, as with small companies or exotic currency pairs,
the market is outside its regular hours, or
prices are moving very fast.

For the private trader the spread is a cost on every round trip, paid whether the trade works or not. The SEC calls it a hidden cost, because it never appears as a separate fee. The more often you trade, the more it matters.

Two stocks, two starts

Liquid stock: bid 100.00, ask 100.02. Mid price 100.01, spread 0.02, or about 0.02%.
Thin stock: bid 9.50, ask 10.20. Mid price 9.85, spread 0.70, or about 7.1%.

Buy the thin stock at the ask of 10.20. To sell without a loss, the bid has to reach 10.20. If the spread stays at 0.70, the mid price must climb to 10.55, a rise of about 7% before you are even back to zero. In the liquid stock, the same break-even needs a move of about 0.02%.

That is the hidden difference between two trades that look identical on a chart. For an investor holding for years, 7% may be bearable. For a trade meant to last a few hours, it is usually decisive.

Common mistakes

Comparing spreads in money instead of percent. A spread of 0.10 can be cheap or very expensive, depending on the price.
Checking the spread once. It changes during the day. Look right before you place an order.
Trading small targets in wide markets. A target of 2% in a market with a 3% spread cannot work.
Ignoring the spread when judging a result. A trade that ended flat on the chart has still lost the spread.
Forgetting that most charts show one price. Many charts plot the last trade or the bid. The price you can buy at may sit noticeably higher.

The takeaway

The spread is a cost you pay up front. Measure it in percent, check it before you trade, and remember that every trade starts slightly behind.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Bid 9.50, ask 10.20. What is the mid price?

The mid price is halfway between bid and ask: (9.50 + 10.20) ÷ 2 = 9.85.
2Bid 100.00, ask 100.02. What is the spread in percent of the price?

0.02 ÷ 100.01 ≈ 0.0002, which is about 0.02%.
3Tap the spread in this thin market.

Tap the chart.

Here the spread is 0.70, about 7% of the mid price. A trade starts that far behind.
4Which situation usually widens the spread?

Uncertainty and thin trading make market makers quote wider. A high share price alone does not.

of 4 correct.