Jamie bought shares in a company he had been watching for two weeks. The stock moved exactly where he thought it would – up by the amount he had targeted. He checked his position. The profit was almost nothing. There was no visible commission charge on the trade. The stock had genuinely gone up. So where did the money go?

The answer was the bid-ask spread. It was the first cost he paid before the trade moved a single point, and he hadn’t known it was there.

This article explains what the bid and ask prices are, how the spread between them is calculated, what makes it wider or narrower, how market makers profit from it, and what you can do to reduce its impact on your trading costs. You may also see the spread referred to as the bid/ask spread or the buy/sell spread – these all refer to the same thing.

What the Bid Price and Ask Price Actually Mean

Every tradeable asset has two prices attached to it at any given moment, not one. The bid price is the highest price a buyer is currently willing to pay for the asset. The ask price is the lowest price a seller is currently willing to accept for it.

When you look at a stock quote on your trading platform, both prices are displayed. Take Apple as an example. You might see a bid price of £182.50 and an ask price of £182.55. If you want to buy the stock immediately, you pay the ask price – £182.55 – because that is what sellers are asking for. If you want to sell the stock immediately, you receive the bid price – £182.50 – because that is what buyers are currently offering.

The bid-ask spread is the gap between these two prices. It is not a fee charged by your broker in the traditional sense. It is the difference built into the market itself, and it exists on every trade across every asset class – stocks, forex, ETFs, bonds, futures, and options.

How the Bid-Ask Spread Is Calculated

The calculation is straightforward. Subtracting the bid price from the ask price gives you the spread in absolute terms.

Spread = Ask Price − Bid Price

Using the Apple example: £182.55 − £182.50 = £0.05. The bid-ask spread is five pence per share. If you bought 100 shares at the ask and immediately sold them at the bid, you would lose £5 before the price had moved at all.

The spread can also be expressed as a percentage of the ask price, which makes it easier to compare across instruments with very different price levels:

Percentage Spread = (Spread ÷ Ask Price) × 100

For Apple at those prices: (0.05 ÷ 182.55) × 100 = approximately 0.027%. That is a tight spread – characteristic of a highly liquid, heavily traded stock. A much wider spread on a less liquid asset would show a meaningfully larger percentage.

What Makes a Spread Wide or Narrow

Liquidity is the primary driver of spread width. Market liquidity refers to how easily an asset can be bought or sold without significantly affecting its price. When a large number of buyers and sellers are actively trading, competition between them keeps bid and ask prices close together, producing tight spreads. When trading volume is low and fewer participants are in the market, the gap widens.

The contrast between EUR/USD and a small-cap penny stock makes this concrete. EUR/USD is one of the most heavily traded currency pairs in the world, with enormous daily trading activity. Spreads on EUR/USD frequently sit at 0.5 to 1 pip – a fraction of a percentage point. A thinly traded small-cap stock with low daily volume might carry a spread of ten or twenty pence on a £2 share, which is 5–10% of the asset’s entire price. That spread cost on a single round-trip trade would require substantial price movement just to break even.

Volatility is the second major factor. When uncertainty is high – around major economic announcements, earnings releases, or unexpected market events – market makers and liquidity providers widen spreads to reflect the increased risk of holding positions. A spread that is tight under normal conditions can widen significantly within seconds of a central bank decision.

Trading hours matter too. Spreads tend to be tighter during peak trading hours, when the greatest concentration of buyers and sellers are active. In the forex market, the overlap between the London and New York sessions typically produces the tightest spreads on major currency pairs. Outside of active hours – during Asian session trading on European pairs, or in the minutes before a major market opens – spreads widen as trading activity thins.

How Market Makers Use the Spread

A market maker is a firm or individual that continuously posts both bid and ask prices for an asset, standing ready to buy or sell at those prices at any given moment. Market makers exist to provide liquidity – without them, buyers and sellers would struggle to find counterparties quickly, and markets would become far less efficient.

The spread is the market maker’s compensation for this role. By buying at the bid and selling at the ask, market makers and liquidity providers earn the spread on each transaction they facilitate. In a highly liquid market, each individual spread is tiny, but the volume of transactions makes the model profitable. The spread represents their payment for maintaining continuous two-sided quotes and absorbing trading risk when they take the opposite side of a trade.

When conditions become uncertain, market makers widen spreads to protect themselves. If a company is about to release earnings, or if a significant economic number is due, the risk of holding an inventory of shares or currency positions increases sharply. Wider bid-ask spreads reflect that risk directly. This is why the cost of trading spikes around major market events – not because brokers are charging more, but because market makers are pricing in the uncertainty they face.

How the Bid-Ask Spread Affects Your Trading Costs

Jamie’s experience at the start of this article was not unusual. A trader who plans their entry based on price movement and ignores the spread will consistently find that their actual profit is smaller than their calculation suggested – because the spread cost is paid on the way in, and on the way out.

Buy 500 shares of a stock at the ask price of £10.05 when the bid is £10.00. The spread is five pence per share – a transaction cost of £25 before the stock has moved at all. When you come to sell those shares, you receive the bid price, not the ask price. If the stock has moved to £10.10 ask / £10.05 bid, you sell at £10.05. Your price appreciation was ten pence per share, but you only captured five after accounting for the spread on exit. Your £50 gain became £25.

On a single trade this may seem modest. Across a high trading frequency strategy – particularly in short-term or day trading where multiple trades are placed in a session – spread costs compound into a material drag on returns. Understanding how spreads impact every trade is not a minor detail. It is a fundamental part of managing the cost of trading.

How to Reduce the Impact of the Spread on Your Trades

The most practical change any trader can make is to use limit orders rather than market orders when spread conditions warrant it. A market order executes immediately at the best available price – which means you buy at the ask and sell at the bid, automatically paying the full spread. A limit order lets you specify the exact price at which you are willing to buy or sell. Rather than accepting whatever the market offers at the moment of execution, you set your price and wait for a seller or buyer willing to meet it.

For traders in actively traded markets, a limit order placed between the current bid and ask can reduce the effective spread paid – sometimes eliminating it almost entirely. The trade-off is that a limit order is not guaranteed to fill if price does not reach your specified level.

Other practical steps: trade during peak trading hours when spreads tend to be at their narrowest; favour instruments with high trading volume and deep liquidity, which consistently carry tighter spreads; and factor the spread into your profit target before entering any position rather than discovering the cost on exit.

Everything described here reflects how markets work mechanically. How you apply it to your own trading decisions should be based on your own analysis and risk management framework – not on any single article. If you want to practise placing limit and market orders on live market data before risking real capital, the Olix Academy Trading Simulator gives you exactly that environment.

Understanding the bid-ask spread is the beginning of understanding what trading actually costs. It sits alongside commissions, overnight financing charges, and tax considerations as one of several layers that determine whether a trade that looks profitable on paper actually produces a return in practice. Getting a clear picture of all of these costs before putting money in is not optional – it is the foundation of any serious trading approach.

If you want to build that foundation properly, Olix Academy’s Beginner Trading Course starts from scratch and works through how financial markets operate, including how trading costs work and how to approach risk management from the beginning. Whether that kind of structured foundation is how you want to approach this is worth thinking about before you start putting money in.

The programme takes 8–12 weeks to complete, with live trading sessions alongside professional traders. 92% of students who complete the Olix Academy programme become profitable within their first six months – which is the outcome of understanding the mechanics properly, not of finding shortcuts around them.

Frequently Asked Questions

How is the bid-ask spread calculated?

The spread is calculated by subtracting the bid price from the ask price: Spread = Ask Price − Bid Price. If the ask price is £50.10 and the bid price is £50.00, the spread is £0.10 per share. To express this as a percentage, divide the spread by the ask price and multiply by 100: (0.10 ÷ 50.10) × 100 = approximately 0.2%. Percentage spread is particularly useful for comparing the cost of trading across instruments with very different absolute price levels.

What is considered a good bid-ask spread?

There is no universal number, because a “good” spread depends entirely on the asset and its liquidity. For major forex pairs like EUR/USD, a spread of 0.5–1 pip is normal and reflects deep market liquidity. For large-cap stocks like Apple or Microsoft, a spread of one or two pence is typical. The concern arises with less liquid instruments – small-cap stocks, exotic currency pairs, or thinly traded ETFs – where spreads of 1% or more of the asset price significantly increase the cost of every trade.

How to interpret the bid-ask spread?

A narrow spread signals high liquidity – many buyers and sellers are actively competing, keeping prices close together. A wide spread signals low liquidity, high volatility, or both – fewer participants mean larger gaps between what buyers will pay and what sellers will accept. For an active trader, a consistently wide spread on a chosen instrument is a warning that the transaction cost of trading that asset is materially high, and should factor into position sizing and profit targets.

How do bid-ask spreads compare to commission costs?

Both are transaction costs, but they work differently. A commission is a direct fee charged by a broker per trade, usually a fixed amount or a percentage of the trade value. The spread is an indirect cost embedded in the prices themselves – it is paid regardless of whether your broker charges a visible commission. Some brokers advertise “zero commission” trading but earn revenue through wider spreads, meaning the cost exists but is less visible. When comparing brokers, examining both commission structures and typical spread widths gives a more accurate picture of the true cost of trading.

What causes a bid-ask spread to be high?

Three main factors drive spreads higher: low market liquidity (fewer buyers and sellers competing reduces pressure to keep prices tight), high volatility (market makers widen spreads to compensate for the increased risk of holding positions during uncertain conditions), and low trading volume specific to an instrument or a trading session. A spread that is normally narrow can widen significantly outside peak trading hours or immediately before and after major economic announcements – both because volume drops and because uncertainty rises.

Is it better to always opt for a narrower spread?

Generally, yes – tighter spreads mean lower transaction costs, which is better for any trader. However, a narrow spread alone does not make an instrument worth trading. An asset with a very narrow spread but extreme volatility, poor risk-reward characteristics, or low alignment with your trading strategy may still be a poor choice. Spread width is one input into the cost of trading, not the only consideration. The practical priority is to avoid instruments where the spread is so wide that you need substantial price movement just to reach break-even on a trade.

---

Every price you see on a trading screen is already a negotiation that has happened without you. The bid and the ask are the market’s two sides of that negotiation – and the spread between them is what it costs to join in. Knowing that changes what you look at before you trade, not just after.