Close Navigation
Learn more about IBKR accounts

Bid-Ask Spread

Trading Term

The bid-ask spread is the difference between the highest price a buyer is willing to pay for an asset (the bid) and the lowest price a seller is willing to accept (the ask). This spread reflects the supply and demand dynamics of the market and serves as a key indicator of liquidity. In highly liquid assets such as large-cap stocks or major currency pairs, the bid-ask spread is typically narrow, while in illiquid or volatile assets, the spread can be significantly wider.

The bid-ask spread represents a transaction cost to traders. Market makers, who provide liquidity by posting bid and ask prices, profit from this spread by buying at the bid and selling at the ask. For retail traders, wide spreads can erode returns, particularly in short-term trading or when using market orders. As such, analyzing the spread helps investors determine the efficiency of trade execution and overall market health.

Several factors influence the size of the bid-ask spread, including trading volume, volatility, market hours, and the specific characteristics of the asset. In times of uncertainty, such as during earnings reports or geopolitical events, spreads often widen as liquidity providers hedge their risk. Understanding the bid-ask spread is essential for informed trading, as it impacts both entry and exit prices and overall trade profitability.

IBKR Campus Newsletters

This website uses cookies to collect usage information in order to offer a better browsing experience. By browsing this site or by clicking on the "ACCEPT COOKIES" button you accept our Cookie Policy.