Trading Fundamentals · Markets and Pairs
Bid, Ask and the Spread
What You'll Learn
- What the bid price and ask price each represent
- Why there are always two prices, not one
- What the spread tells you about a market
The Big Idea
You may be wondering: does a market really have just one price? I want to correct that idea right away. A market actually has two prices at any given moment: the bid, the highest price a buyer is currently willing to pay, and the ask, the lowest price a seller is currently willing to accept. The gap between them is called the spread.
Let's Break It Down
The bid price reflects buyers. It is the best, meaning highest, price someone is currently offering to buy at. The ask price reflects sellers. It is the best, meaning lowest, price someone is currently offering to sell at. These two prices sit on either side of wherever the "market price" you see quoted actually comes from.
The spread is simply the difference between the ask and the bid. A narrow spread means buyers and sellers are offering prices very close to each other. A wide spread means there is a bigger gap between what buyers are willing to pay and what sellers are willing to accept.
Here is why the spread matters in practice: it represents a built-in cost of trading. If you bought at the ask and immediately tried to sell at the bid, you would typically come out slightly behind, simply because of that gap — separate from any additional fees a platform might charge.
Real Example
Picture a busy flea market. One buyer says, "I'll pay $95 for that." A seller replies, "I won't take less than $100." In this scene, $95 is the bid, $100 is the ask, and the $5 gap between them is the spread. Notice that the item has not actually changed hands yet at either price.
Why It Matters
Understanding bid, ask and spread explains why a single "price" you glance at is really a simplification of two competing prices. This becomes especially relevant once you reach order types in the next lesson, since where your order sits relative to the bid and ask determines whether — and how quickly — it gets filled.
Common Mistake
Do not assume there is only one true price at any moment. In reality, there is always a buyer's price and a seller's price, and the space between them, the spread, is a real, practical part of how markets function.
Quick Check
What does the spread represent?
Key Takeaways
- The bid is the highest price a buyer currently offers; the ask is the lowest price a seller currently accepts.
- The spread is the gap between the bid and the ask.
- A narrower spread generally means buyers and sellers are closer in price; a wider spread means a bigger gap.
Finished reading?
Mark this lesson as complete to track your progress.