What is Bid-Ask Spread?
The bid-ask spread is the gap between the highest bid (buy order) and lowest ask (sell order) prices in a market. This spread represents the difference between what buyers are willing to pay and what sellers are willing to accept, serving as a key indicator of market liquidity.
Components
Bid Price
- Highest price buyers offer
- Maximum immediate sell price
- Lower of the spread
- Taker sell price
Ask Price
- Lowest price sellers offer
- Minimum immediate buy price
- Higher of the spread
- Taker buy price
Market Implications
Liquidity Indicator
- Narrow spread = High liquidity
- Wide spread = Low liquidity
- Market efficiency measure
- Trading cost component
Trading Impact
- Transaction costs
- Market making profits
- Entry/exit timing
- Order type selection
Related Terms
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