What is Spread?
Spred
In short
The difference between the ask and the bid. A few cents for liquid stocks, much wider for thinly traded ones.
Also known as: bid-ask spread
The spread is the difference between the ask and the bid. It is a hidden cost on every trade: buy and immediately sell, and you lose the spread even if the price has not moved.
Formula
- Spread ($) = Ask − Bid
- Spread (%) = (Ask − Bid) ÷ Midpoint × 100, where midpoint = (Ask + Bid) ÷ 2
The percentage spread is handier for comparing stocks at different prices: a $0.05 spread is trivial on a $500 stock and large on a $2 stock.
What drives the spread
- Liquidity. In large companies that trade millions of shares a day, the spread is 1–2 cents. In small, thinly traded stocks it can be tens of cents or several percent.
- Time of day. Spreads widen in the first minutes after the open, in pre-market and after-hours.
- Volatility and news. When uncertainty rises, market makers widen spreads to protect themselves.
Why it matters to a trader
In short-term trading the spread hits results directly: trade in and out often and you pay it every time. So in wide-spread stocks use limit orders and place your stop-loss with the spread in mind. Together with slippage, the spread is a major part of trading costs.
Buy with a market order and sell straight away, and you lose roughly the spread. In a large stock that is almost nothing; in a small, thinly traded one it can be 2%.
Example
Compare two fictional stocks:
- Large stock: bid $150.00, ask $150.02 → spread $0.02. Midpoint $150.01, spread ≈ 0.013%.
- Small stock: bid $4.90, ask $5.10 → spread $0.20. Midpoint $5.00, spread = 0.20 ÷ 5.00 = 4%.
Buy 200 shares of the small stock and sell straight away: buy 200 × $5.10 = $1,020, sell 200 × $4.90 = $980. You lose $40 (about 3.9%) without the price moving. In other words, the price must first rise by at least the spread for this trade to make money.
Mistakes and tips
Estimate the spread as a percentage before trading: anything above 0.5% is a serious cost for a short-term trade.
Do not place a stop-loss too close in a wide-spread stock — ordinary bid/ask flicker can hit it.
Wait a few minutes after the open: spreads often tighten during that time.
Frequently asked questions
- What should I do if the spread is wide?
- Use a limit order instead of a market order, trade smaller, or wait for a more liquid time. A persistently wide spread signals a thinly traded stock.
- Is there no spread at a commission-free broker?
- There still is. The spread exists in the market itself, between buyers' and sellers' prices; the broker's commission is a separate cost.
Learn it in the Academy
This term is covered with hands-on examples and a quiz in these lessons of the interactive course.
- How the US market worksExchanges and brokers, sessions in Tashkent time, spread and liquidity, five order types with examples, T+1, costs and fractional shares.Open lesson · 12 min
- Risk and position sizeHow much you're willing to lose on one trade, how many shares that means, and which account-level limits you need — with formulas and worked examples.Open lesson · 11 min
- Demo trading: practice without money, but seriouslyMaking demo realistic, a 30-day plan, which numbers to track and when to move to real money.Open lesson · 11 min
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