Stock market basics · Beginner

Understanding the Bid-Ask Spread

The spread is what you pay to transact right now. It looks trivial per trade and compounds into one of the largest costs in an active account.

Last reviewed 15 September 2026 by the MarketPro research desk · Editorial policy

In short

The bid-ask spread is the gap between the highest price a buyer will pay and the lowest price a seller will accept. If the bid is $47.80 and the ask is $47.84, the spread is four cents, and a buy followed immediately by a sell loses that four cents per share. It is the compensation earned by whoever stands ready to take the other side of your order, and it is a trading cost separate from commission.

What to remember

The spread is a real cost paid on every round trip, charged by nobody and deducted automatically.
Four cents on 500 shares is $20 a round trip. Sixty round trips a year is 2.4% of a $50,000 account before commission.
Always read the spread as a percentage of price. One cent is 0.0025% on a $400 stock and 0.5% on a $2 one.
Spreads widen at the open, into news and after hours, which is exactly when a triggered stop becomes a market order into thin depth.

Lesson 11 of 18 in Stock market basics

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The spread is the price of immediacy

The bid-ask spread is the gap between the highest price a buyer will pay and the lowest price a seller will accept. If the bid is $47.80 and the ask is $47.84, the spread is four cents. Buy at the ask and sell at the bid in the same instant and you are down four cents a share with nothing having happened.

That gap is not a fee anyone charges you. It is the compensation earned by whoever is willing to stand on both sides of the market and take the other end of your order right now. You are paying for immediacy, and the size of the payment depends entirely on how badly the other side wants to be there.

What a four-cent spread costs across sixty round trips

The number looks negligible and the annual total does not. Work an example on a $50,000 account.

A position of 500 shares at $47.82 is $23,910. Buying at the ask and later selling at the bid gives up the full four cents a share, so the round trip costs 500 × $0.04, which is $20. That is 0.084% of the position.

Now trade it sixty times in a year, which is roughly once a week. Sixty round trips at $20 is $1,200, or 2.4% of the account, paid before a single commission and before any losing trade. A strategy expected to return 8% a year has just handed back 30% of its edge to the spread alone. Move to a stock with a twelve-cent spread and the same activity costs $3,600, or 7.2%.

This is the same arithmetic behind pip costs in forex, which is why the pip calculator and the rebate calculator exist on the currency side.

It also changes which strategies are viable at all. A holding period of six months absorbs a 0.084% round trip without noticing. A strategy that trades several times a day against the same cost structure needs an edge per trade larger than the spread before anything else is considered, which is why high-frequency approaches live or die on execution quality rather than on analysis.

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Why some spreads are a penny and others four percent

Spread width is a function of how confident the market maker is about the price and how quickly they can lay off the risk.

Volume. A stock trading 30 million shares a day can be hedged in seconds, so a one-cent spread is enough compensation. One trading 40,000 shares cannot.
Volatility. The wider the likely move while the maker holds inventory, the more they must charge to take it on.
Price level. A one-cent spread on a $400 stock is 0.0025%; the same cent on a $2 stock is 0.5%, so always read the spread as a percentage, never in cents.
Information risk. If the maker suspects the order flow knows something they do not, they widen defensively. This is why spreads blow out before scheduled announcements.

The extreme case is instructive. A micro-cap quoted $2.10 bid, $2.22 ask has a 5.5% spread. Buy there and you are immediately 5.5% underwater against an instant resale, which means the position needs a 5.8% gain simply to break even on the round trip.

When a normally tight spread blows out

Spreads are not stable through the day. In the opening minutes, before the auction has settled and depth has rebuilt, they are several times their midday width. They widen again into the close, though usually less. They widen sharply in the seconds around an unexpected headline, and they stay wide through the after-hours session, where a stock with a one-cent daytime spread can quote twenty cents wide on a handful of shares.

The pattern that catches people is a stop order executing during one of these windows. A stop becomes a market order when triggered, and a market order in a wide, thin market fills at whatever is resting. The stop did what it was designed to do; the market it landed in was the problem.

Four habits that stop the spread eating the edge

None of these are sophisticated, and together they usually save more than any refinement to entry timing.

Quote the spread as a percentage before every trade, and set a threshold you will not cross. Many people use 0.5% for anything they intend to hold short term.
Use limit orders as the default. You give up certainty of execution to gain certainty of price, which is the right trade for anyone who is not in a hurry.
Avoid the first and last fifteen minutes unless the strategy specifically requires them.
Count the spread in the expectancy calculation. A system with a 0.3% average edge per trade does not survive a 0.2% round-trip cost, and no amount of discipline fixes that.

The last point is the one that matters most. Trading costs are subtracted from the edge, not from the profits, which is why they belong inside the plan rather than in a note afterwards. The risk management guide covers how to work that into a full expectancy calculation.

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Written and reviewed by the MarketPro research desk

MarketPro is a trading-signal and trading-education app operated by Harajuku Holdings LTD (Cyprus). Our signal desk publishes and tracks every trade idea in-app, and every page here is checked against the app's live behaviour before publishing. Last reviewed 15 September 2026. How we produce signals and content · About MarketPro

FAQ

Understanding the Bid-Ask Spread: questions

What causes a wide bid-ask spread?

Low trading volume, high volatility, a low share price and uncertainty about pending information all widen it. Market makers quote a spread that compensates them for holding inventory they may not be able to offload quickly. The less confident they are about the price, or the harder the position is to hedge, the wider the quote they post.

Does the bid-ask spread count as a trading cost?

Yes, and for active traders it is often larger than commission. A four-cent spread on a 500-share position costs $20 per round trip, which across sixty trades a year totals $1,200. That sum is deducted from the strategy’s edge rather than from its profits, so a thin edge can be entirely consumed by spread alone.

How do I avoid paying the full spread?

Use limit orders placed inside the quote rather than market orders, which accept whatever is resting. You give up certainty of execution in return for certainty of price. Avoiding the first and last fifteen minutes of the session helps too, since spreads in those windows are routinely several times their midday width.

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