Lesson 2 of 5 · 6 min read
Bid, ask & spread
Behind every quote there are two prices: the bid price and the ask price. The difference is the spread.
Bid and ask
The bid price is the highest price a buyer is willing to pay. The ask price is the lowest price a seller is willing to sell for. If you buy right now, you pay the ask price; if you sell right now, you get the bid price.
The spread
The difference between bid and ask is called the spread. For heavily traded shares (Apple, ASML) it is tiny — a few cents. For thinly traded or exotic securities the spread can be large, and that is a hidden cost.
Liquidity
A small spread goes with a 'liquid' market: many buyers and sellers, easy to enter and exit. A large spread points to low liquidity. That's why a limit order is especially helpful with less liquid shares: you avoid overpaying because of a wide spread.
Remember this
- The bid price is the highest buying price, the ask price the lowest selling price.
- You buy immediately at the ask price and sell immediately at the bid price.
- The spread is the difference between bid and ask — a hidden cost, large when liquidity is low.
- For less liquid shares a limit order protects against a wide spread.
There is a quiz for this lesson
3 questions that check whether it stuck. They live in the app, because a quiz nobody grades teaches nothing.
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