The Basics Of The Bid-Ask Spread

The spread is the difference between the bid and ask for a particular security. The spread comes from the concept of supply and demand. Supply refers to the volume or abundance of stock in the marketplace. Demand refers to the want or need to buy a particular stock. Both the bid and the ask have prices and this is one way in which you can tell how liquid a stock is.

On stocks that trade millions of shares a day, the bid-ask spread may be only $.01 while some stocks that trade a few thousand shares a day may have a spread as large as $.15 or more. With the introduction of penny options recently, option bid-ask spreads are becoming more like those of stocks. For example, you could see a $.05 spread between the bid and the ask and that was as narrow as the spread got. Now, you can literally see $.01 spreads on the more liquid options.