Bid, ask, spread and liquidity explained

Every stock quote contains two prices: what buyers are willing to pay right now and what sellers are asking right now. The gap between them is a real cost of trading, and its size tells you how easily a stock can be bought or sold. Understanding it helps you choose the right order and avoid paying more than you need to.

Bid, ask and spread

The bid is the highest price any buyer is currently offering. The ask (also called the offer) is the lowest price any seller is currently accepting. The spread is the difference between the two. Each side of the quote also shows a size, which is the number of shares available at that price.

Because US stocks trade on several exchanges and trading venues, brokers usually show the best bid and best ask found across all of them. This consolidated quote is often called the national best bid and offer, or NBBO.

Midpoint     = (Ask + Bid) / 2
Spread ($)   = Ask - Bid
Spread (%)   = (Ask - Bid) / Midpoint x 100

If you buy with a market order you normally pay the ask, and if you sell with a market order you normally receive the bid. Buying and then selling immediately therefore loses roughly the spread, even if the "price" of the stock has not moved at all. That is the cost market makers earn for standing ready to trade, which is covered in market makers and high-frequency trading.

Example (illustrative numbers)

Compare two stocks.

Buy 100 shares of Stock A at the ask and you pay $10,001. Sell them straight back at the bid and you receive $10,000, a round-trip cost of $1.

Buy 100 shares of Stock B at the ask and you pay $1,000. Sell them straight back at the bid and you receive $980, a cost of $20. The price has to rise about 2% before you are even back to break-even. Same share count, very different cost.

What liquidity means

Liquidity is the ability to buy or sell quickly, in meaningful size, without moving the price much. It has three practical dimensions:

• Tightness: how narrow the spread is.
• Depth: how many shares are quoted at and near the best prices.
• Activity: how much of the stock trades each day.

Large, widely followed companies tend to be highly liquid because many buyers, sellers and market makers compete to trade them. Smaller or lesser-known companies are often less liquid. Market capitalization is a rough guide, but it is not a guarantee, since some mid-sized stocks trade less than their size suggests.

Spreads also change through time. They usually widen when volatility jumps, when important news breaks, and outside regular hours, as explained in pre-market and after-hours trading. Market makers widen their quotes when they are less sure what a fair price is.

Market impact and slippage

Quotes show only a limited number of shares at each price. If your order is larger than the size at the ask, the remainder fills at the next prices up. Your average price is then worse than the first quote you saw. This is sometimes called slippage or market impact.

For small retail orders in large stocks it is usually negligible. In thinly traded stocks it can matter a great deal. A limit order sets the worst price you will accept, which is why order choice matters. See market, limit and stop orders.

How to read it: rules of thumb

These are rough guides, not thresholds set by any authority.

• A spread of a cent or two on a large, heavily traded stock is common. As a share of price, well under 0.1% is generally considered tight.
• A spread above about 1% of the price is generally considered wide, and a market order there will cost noticeably more than the quote implies.
• The shorter your holding period, the more the spread matters. A long-term investor pays it on the way in and on the way out, but it is spread across years of holding.
• Average daily volume gives context. A stock that trades millions of shares a day can usually absorb a retail order easily.

Common mistakes

• Treating the last price as the price you will get. The last price is just the most recent trade. You will transact at the bid or ask, or at a price you set with a limit order.
• Using market orders in thin stocks. The fill can be well away from the price you saw.
• Assuming a quote is permanent. Displayed quotes change many times a second, so the price on your screen may already be stale.
• Equating a low share price with a cheap trade. A $5 stock with a $0.05 spread has a 1% spread, which is a bigger proportional cost than a $500 stock with a $0.10 spread.
• Ignoring the cost entirely. Commission-free trading does not mean cost-free trading. The spread is still there.

Where to see it on StocksXray

StocksXray works with end-of-day prices rather than live quotes, so the bid and ask appear on your broker's order ticket, not on the site. What you can use here is volume. The volume spike scanner lists stocks trading unusually heavily compared with their own norm, which is one clue that liquidity and interest have changed.

Key takeaways

• The spread is the ask minus the bid, and a market order effectively pays it.
• Express the spread as a percentage of price to compare stocks fairly.
• Liquidity combines tight spreads, depth and trading activity, and it can disappear when markets are stressed.
• Limit orders give you control over price, which matters most in wide-spread or thin stocks.