Bid-ask spread

Definition

Bid-ask spread in plain English

When you buy or sell a stock, there's usually a middleman (a 'dealer') standing ready to trade instantly. They quote two prices: the lower one they'll pay to buy from you (the bid) and the higher one they'll charge to sell to you (the ask). The gap between those two is the bid-ask spread, and it's basically the middleman's cut for providing that convenience — like a currency booth at the airport that buys dollars cheap and sells them dear, pocketing the difference. A tiny spread means a busy, easy-to-trade security; a wide spread signals something thinly traded or risky, and it's a real cost you pay every time you jump in and out.

Related Principles of Finance terms

• Agency bond
• American option
• Arbitrage pricing theory (APT)
• Asset-backed security (ABS)
• Basis risk
• Bookrunner
• Carhart four-factor model
• Clientele effect
• Collateralized debt obligation (CDO)
• Common-size analysis