Bid Ask Spread - Learn What It Is and Why It Is Important for You

Jan 2019
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Bid Ask Spread - Learn What It Is and Why It Is Important for You

Bid ask spread
Bid Ask Spread Definition

Bid ask spread is the difference between the best sell and the buy price. It's a synonym to spread, used interchangeably with it. With other words it's the difference between the best (highest) purchase and the best (lowest) sell price on the market. Spreads are important when calculating the trading fees.

Bid ask spread
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Brokers can do one of the two fee settings:

  1. pass through the market spread, and tell their commissions, or with other words, markups
  2. provide straight away their own spread which includes their fees

The stock brokers, like Interactive Brokers or Saxo Bank, use bid ask spread at most assets. It means they use the market bid and ask price, i.e. don't incorporate their fees into spreads. However, they apply commissions. This method is considered more transparent.

The CFD brokers, like eToro or Plus500, quote a final spread and incorporate their fees into them. On the other hand, they usually don't apply commissions.

Bid ask spread
What does a large spread between bid and ask mean?

It means a huge difference between the bid and the ask price. At some products, for example liquid assets, this is very low. On the other hand at illiquid assets it is high.

For example currencies at normal market conditions have normally 0,0x% spreads, while at penny stocks spreads can be 10s of percentages. All in all the size of the spread correlates with the liquidity of the spread.

The size of the spread can also indicate market interest: if a lot of people want to trade with the asset the spread is small.
 

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