Understanding the Bid-Ask Spread: A Beginner's Guide

The bid-ask spread is something that you will need to become familiar with if you plan on trading stocks in the future. Here are the basics of the bid-ask spread and what it means to investors.

Bid-Ask Spread

Whenever you are trading in a live market, there are going to be sellers that have securities to sell and buyers that want to purchase these securities. The buyers are going to want to pay as little as they possibly can in order to purchase a security. The sellers are going to want to charge as much as they possibly can when they sell the security. In most cases, the prices that each person has in mind are not the same value. The difference between the lowest priced that the seller is willing to sell for and the highest priced that the buyer is willing to pay is known as the bid-ask spread. 

Calculating the Bid-Ask Spread

In order to determine what the bid-ask spread of a stock is, you simply need to subtract one price from the other. For example, if the seller is willing to sell a stock for $50 a share and the buyer is willing to pay $48 per share, the bid-ask spread is $2.