Spread

Stock trading dictionary: meaning, example and how traders use it.

Last updated: October 17, 2026

Definition: The spread, or bid-ask spread, is the difference between the highest price a buyer will pay (the bid) and the lowest price a seller will accept (the ask). In options, a spread also means a strategy combining contracts.

How the bid-ask spread works

Every stock quote shows two prices. The bid is the best price at which someone is willing to buy, and the ask (or offer) is the best price at which someone will sell. The spread is the ask minus the bid. Market makers and liquidity providers earn the spread by buying at the bid and selling at the ask, which compensates them for holding inventory and for the risk of prices moving against them.

For traders, the spread is an implicit cost: buying at the ask and immediately selling at the bid would lose exactly the spread.

Spread example and formula

Suppose a stock is quoted at bid $50.00, ask $50.05. The spread is $0.05. As a percentage of the midpoint ($50.025), that is about 0.10%. If you buy 1,000 shares with a market order, you pay about $50 more than the midpoint value; selling right away would cost another $50 or so.

Now suppose a thinly traded small company is quoted at $4.80 by $5.00. The $0.20 spread is about 4% of the price, a much larger cost relative to the trade.

What affects the spread

  • Liquidity: heavily traded large-cap stocks usually have spreads of a cent or two.
  • Volatility: spreads tend to widen when prices are moving fast or news is pending.
  • Time of day: spreads are often wider at the open and in after-hours trading.
  • Share price and market: low-priced, OTC, and foreign-listed stocks often carry wider spreads.

Using limit orders lets you control the price you pay instead of accepting the far side of a wide spread.

Why the spread matters to traders

For a long-term investor buying a liquid stock a few times a year, a penny-wide spread is a minor cost. For active traders, the cost compounds: someone making many trades a day in a stock with a wide spread can give up a meaningful share of potential profits to the spread alone. The spread also affects stop orders, since a stop that triggers into a wide market can fill well below the expected price. Watching the spread before placing an order, and avoiding market orders in thin markets, are simple habits that reduce trading costs.

Other meanings of spread

In options trading, a spread is a strategy that buys one option and sells another on the same underlying, with different strikes or expirations. A credit spread brings in a net premium, while a debit spread costs money upfront; both cap potential gains and losses. In bonds, spread usually means the difference in yield between two securities, such as a corporate bond and a Treasury of similar maturity.

Frequently asked questions

What is a good bid-ask spread?

For actively traded large-cap US stocks, spreads of a cent or a few cents are typical. A spread that is a large percentage of the share price signals lower liquidity and higher trading costs.

Why do bid-ask spreads widen?

Spreads widen when liquidity is thin, volatility is high, news is pending, or trading occurs outside regular market hours, because liquidity providers face more risk.

How do you avoid paying the spread?

You cannot avoid it entirely, but limit orders placed between the bid and ask, trading liquid securities, and trading during regular hours can reduce the cost.

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For information only, not investment advice. See the disclaimer.