Bid-Ask Spread and Stock Liquidity
The bid–ask spread is the difference between the best quoted purchase and sale prices for a defined venue or consolidated view. It is one component of transaction costs and a limited measure of liquidity.
How it works
Absolute spread=ask−bid. A relative spread often divides that difference by the midpoint. Depth and resilience matter alongside spread: a tight quote for a few shares may not support a large order. Quoted spread and realized execution cost are different measurements.
Worked example
A quote of 49.90 bid and 50.10 ask has spread 0.20 and midpoint 50. Relative spread is 0.20/50=0.4%. Buying at 50.10 and immediately selling at 49.90 loses 0.20 per share before commissions. For 200 shares that is 40, assuming both displayed prices remain executable for the full size.
Amounts, prices and scenarios are fictional teaching examples. They exclude any effects not explicitly stated and are not trade recommendations.
Limits and common mistakes
Spreads can widen near announcements, openings or stress. Some orders receive price improvement, while large orders can walk through levels. Do not double-count spread if a simulation already fills purchases at ask and sales at bid.
Knowledge check
Does a narrow spread guarantee a low-cost large trade?
Read the explanation
No. Available size, market impact, fees and quote changes can dominate the best displayed price difference.
References and further reading
- SEC Investor.gov: stocks, ownership and risks
- SEC: company filings and financial reports
- SEC: beginners’ guide to financial statements
These sources explain the underlying concepts and specifications. They do not endorse QBMFX Academy. Check the relevant market, protocol version and reporting rules before applying an example.