Execution & trading costs

Bid-ask spread

Bid-ask spread is the difference between the lowest displayed price to sell a stock (ask) and the highest displayed price to buy it (bid), measured per share.

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What it means

A stock quote shows two sides of a potential trade: the bid, the highest displayed price a buyer is willing to pay, and the ask, the lowest displayed price a seller is willing to accept. The gap between them is the bid-ask spread. It is also called the quoted spread.

For someone selling immediately, the bid is the relevant displayed price; for someone buying immediately, it is the ask. Those prices can change before an order is filled, and the displayed quantity at either price may be smaller than the order. A quote therefore shows a potential cost, not a guaranteed fill price.

How it is calculated

The spread can be stated in currency per share, cents per share, or as a percentage of the midpoint:

Spread per share = Ask price − Bid price

Midpoint price = (Ask price + Bid price) / 2

Spread (%) = (Ask price − Bid price) / Midpoint price × 100

  • Ask price: the lowest displayed selling price, in US$ per share in a US stock example.
  • Bid price: the highest displayed buying price, in US$ per share.
  • Midpoint price: the average of the bid and ask, in US$ per share.
  • Spread per share: the ask minus the bid, in US$ per share; the percentage formula expresses that gap relative to the midpoint.

A quoted spread is different from an effective spread, which uses an actual execution price rather than only the displayed quote.

Worked example

Suppose a hypothetical stock has a bid of US$49.95 and an ask of US$50.05. Ignore commissions, price changes and market impact for this illustration.

  1. Subtract the bid from the ask: US$50.05 − US$49.95 = US$0.10 per share.
  2. Calculate the midpoint: (US$50.05 + US$49.95) / 2 = US$50.00 per share.
  3. Express the spread as a percentage: US$0.10 / US$50.00 × 100 = 0.20%.
  4. For 100 shares, buying at the ask rather than at the midpoint costs US$5 relative to that midpoint: 100 × US$0.05. Selling at the bid is likewise US$5 below the midpoint. An immediate buy at the ask followed by an immediate sale at the unchanged bid would lose US$10 across the 100 shares solely to the spread.

The US$10 round-trip difference is not a commission. Nor is it a prediction of what an actual round trip would cost: quotes and available quantities can change.

Why it matters before you trade

The spread is one component of execution cost. A wider spread makes the price of an immediate buy higher relative to the midpoint and the price of an immediate sale lower. Its significance depends on the number of shares, not just the percentage: multiply the per-share gap by the quantity to see the full quoted round-trip gap, assuming unchanged prices and sufficient displayed quantity.

It is also a liquidity clue, but not a complete liquidity measure. A narrow displayed spread does not mean that a large order can be filled entirely at the best price. Available quantity, trading volume and potential market impact matter too. Spreads can change as quotes update, so a snapshot may not describe the market when an order reaches it. A limit order sets a price boundary, but may remain unfilled.

How PreTrAIde uses it

PreTrAIde is a pre-trade analysis platform, not a broker. Before a user places an order, its quantitative layer estimates the bid-ask spread using a liquidity-tier model with a volatility uplift and a one-tick floor. The estimate contributes to its assessment of execution conditions alongside measures such as participation in daily volume and estimated market impact.

PreTrAIde returns GO, NO-GO or MODIFY verdicts for a basket and its individual stock lines, with reasoning and a suggested execution strategy. These are decision-support outputs, not recommendations or guaranteed execution costs. Users place any trades themselves through their own broker.

Common mistakes

  • Treating the spread as a separate broker fee. It is a difference between quoted prices, not a commission charged on top of a fill.
  • Confusing the full spread with one side's midpoint cost. At a symmetric quote, an immediate buy at the ask is half the spread above the midpoint; the full spread describes the bid-to-ask gap.
  • Assuming every share fills at the best quote. Displayed quantities may be insufficient, and a larger order may reach other prices.
  • Treating an estimate or snapshot as a fixed cost. The quoted spread can change, while the realized execution cost depends on actual fills.

Frequently asked questions

How do you calculate the bid-ask spread?

Subtract the bid price from the ask price to get the spread per share. To express it as a percentage, divide that difference by the bid-ask midpoint and multiply by 100.

Is the bid-ask spread the same as a commission?

No. The spread is the difference between quoted buying and selling prices; a commission is a separate broker charge, if applicable.

Do you always pay the full bid-ask spread when buying a stock?

No. Buying at the ask places the fill half the quoted spread above the midpoint when the quote is symmetric around that midpoint. An actual fill may occur at another price, and a later sale depends on the quotes and execution available then.

Related terms

Midpoint price Midpoint price is the price halfway between the current best bid and best ask for a security, calculated as their arithmetic average. Effective spread Effective spread is twice the distance between a trade’s execution price and the prevailing bid-ask midpoint, expressed per share or as a percentage of that midpoint. Execution cost Execution cost is the amount paid to complete a trade beyond a chosen reference price, including the effect of the fill price and, when specified, trading fees. Market impact Market impact is the price movement attributable to executing a trade, as the order consumes available liquidity or prompts other market participants to adjust their prices. Liquidity Liquidity is the ability to buy or sell an asset promptly in the desired quantity without substantially moving its price or incurring excessive trading costs. Tick size Tick size is the smallest permitted price increment for a security’s displayed quotes or orders under the rules of its trading venue.

Execution & trading costs

Pre-trade analysis Post-trade analysis Transaction cost analysis (TCA) Realized spread Slippage Implementation shortfall Transaction costs Commission All glossary terms →

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Educational content, not investment advice. PreTrAIde is analysis software, not a broker: it never executes orders, and its verdicts are decision support, not recommendations to buy or sell.