Glossary
Bid-Ask Spread
The gap between the highest price a buyer is offering and the lowest a seller will accept, usually quoted in cents per share.
If the bid is $49.98 and the ask is $50.02, the spread is four cents. That gap is not a fee anybody charges and it appears on no statement. It is the cost of transacting immediately instead of waiting, and it is paid by whoever crosses the gap to get filled now.
How wide it gets tracks how many people are trading. On a company with millions of shares changing hands a day, orders stack up so densely on both sides that the spread is a penny or two. On a small or rarely traded company it can be several percent of the share price, which is a real amount of money on a round trip in and back out.
The same company can have a narrow spread at 11am and a wide one at 7pm, because the crowd thins out after the close. That is one reason the extended sessions behave differently from the regular one, and why the choice between a market order and a limit order matters more there than it does at midday.
Learn this properly
Lesson 3: How Buying a Stock Actually WorksBrokerage accounts, what happens in the seconds after you press the button, and order types explained without the jargon.
Related terms
- Bid and AskThe two live prices behind every quote: the most a waiting buyer will pay, and the least a waiting seller will accept.
- LiquidityHow easily something can be turned into cash near its quoted price, without the act of transacting moving that price.
- Market OrderAn instruction to trade immediately at whatever price is currently available, rather than at a price you name.
- Limit OrderAn instruction to trade only at a stated price or better, which may go unfilled if that price is never reached.
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