What is the Bid-Ask Spread?
Bid Price- Highest price a buyer is willing to pay to buy shares of a particular company at any given time. If you are selling a stock, you will receive the bid price.
Ask Price- Lowest price at which a seller is willing to sell a stock. If you are buying stock, you will pay the asking price.
A Bid-Ask Spread is the difference between:
- The highest price that a buyer is willing to pay.
- The lowest price that a seller is willing to accept.
An order gets executed when the bid and ask price match, i.e., when a buyer and seller agree to the prices offered by each other.
Factors that affect Bid-Ask Spread:
1. Liquidity
The bid-ask spread of a stock is a measure of its liquidity in the market.
| Market Liquidity | Spread Value (the difference between the bid and ask prices) |
|---|---|
| High liquidity | Very small |
| Illiquid (less liquid) | Large |
2. Volatility
When volatility increases, the bid-ask spread increases and vice versa.
3. Stock Price
The lower the price, the higher the bid-ask spread and vice versa. It all comes down to supply and demand and liquidity. Most low-priced securities will either be new or small in size. Therefore, the number of these securities that can be traded is limited, making them less liquid. Similarly higher demand and tighter supply means a lower spread.
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