A spread is the difference between the price you can sell at and the price you can buy at. In a live quote those are the bid and the offer. The tighter that gap, the cheaper it usually is to trade.
People also use “spread” in two other ways. Bond investors talk about yield spreads, the extra yield one bond pays over another. Traders talk about spread strategies, where you buy one thing and sell another to express a view on the gap between them. Context tells you which meaning applies.
What is a bid-ask spread and why it matters
The bid is the highest price buyers are currently willing to pay. The ask, or offer, is the lowest price sellers are willing to accept. The spread is ask minus bid. If a stock is 250.00 bid and 250.10 offered, the spread is 0.10.
Why it matters: if you buy at 250.10 and immediately sell at 250.00, you lose 0.10 per share before fees. That gap is a built-in trading cost. Tight spreads make it easier for traders to get in and out with less drag. Wide spreads raise the bar for a trade to be profitable.
Market makers and dealers quote two-way prices and aim to capture part of this spread as revenue for providing liquidity and taking on inventory risk.
How to read and calculate spread cost
Spreads are shown in different units depending on the market:
- Shares and ETFs: cents or pennies per share, or as a percentage of the mid-price.
- FX: pips (usually 0.0001) or fractional pips.
- Futures: ticks, the smallest permitted price step for that contract.
- Bonds: cents per 100 of face value, or basis points when discussing yields.
- Crypto: quote currency units (for example, USDT) or as a percentage.
A quick way to estimate the cost of “crossing the spread” is:
- Per-unit cost: ask minus bid.
- Total cost: spread × number of units traded.
- Percentage spread: spread ÷ mid-price × 100.
Example: the market is 100.00 bid and 100.10 offer. The mid is 100.05 and the spread is 0.10, which is 0.10 percent of the mid. If you buy 1,000 shares at 100.10 and later sell at 100.00, the spread cost is 100 currency units before any other fees.
Some brokers add a markup to wholesale prices or charge a commission on top. Others advertise commission-free trading but recover costs through the spread. Exact pricing varies by provider and product type.
What moves the spread during the day
Spreads are not fixed in most markets. They widen and tighten as conditions change. Common drivers include:
- Liquidity: Heavily traded instruments with deep order books tend to have tighter spreads. Small caps or obscure pairs often trade wider.
- Volatility and news: When prices jump around, market makers need more room for error, so spreads can widen.
- Time of day: Spreads often widen near the open and close, and during quiet overnight sessions.
- Order size: Large orders can move through quoted size and into higher or lower prices, increasing the effective spread you pay.
- Market structure: Fees, tick sizes and how venues match orders all influence displayed spreads.
Wider spreads can amplify slippage, the gap between your expected and actual fill. Using limit orders, trading when liquidity is strongest, and breaking up large orders are common ways to manage this. In fragmented equity markets, smart order routers may seek venues with better prices or rebates to improve effective spread, though behaviour varies by provider.
Other meanings: yield spreads and strategy spreads
Yield or credit spread: In fixed income, spread usually means the difference in yield between two bonds. A classic example is a corporate bond’s yield minus a government bond yield of similar maturity. It is quoted in basis points. A spread that “widens” suggests the market demands more compensation for holding the riskier bond. A spread that “tightens” suggests improving confidence or scarce supply. There are many variants: curve spreads between maturities, sector spreads across industries, and country spreads in sovereign debt.
Spread strategies: In derivatives and relative-value trading, a spread is a position that pairs a long with a short. Examples include:
- Options vertical spread: buy a call at 100 and sell a call at 105 in the same expiry. Your maximum loss is the net premium paid; your upside is capped at 5 minus that premium.
- Calendar spread: buy one expiry, sell another, aiming to benefit from time decay or expected changes in volatility.
- Futures calendar: long a near-month contract, short a later-month contract to trade the curve shape.
- Pairs trade: long one stock and short a related stock to express a view on their relative performance.
These strategy “spreads” are not costs like the bid-ask spread. They are positions built from two legs whose value depends on how the gap between the legs changes over time.
Where you see spreads on platforms and in reports
On trading screens you will usually see a live bid and offer, often with displayed size. Some venues show a consolidated inside market, while others display venue-specific prices. In fast markets the numbers refresh quickly, and your order may fill at a different level if the spread shifts while you are submitting.
Reports and research use spread language in context. For equities and FX, commentary might say “spreads widened after the headline,” meaning the bid-ask gap increased. For bonds, it might read “the 5-year credit spread tightened by 15 basis points,” referring to a yield difference. For options or futures desks, talk of “the spread” often points to a specific two-leg trade they are running.
Common confusions and how to keep them straight
- Cost vs position: A bid-ask spread is a trading cost. An options or futures spread is a constructed position.
- Price spread vs yield spread: A share or FX spread is measured in price units. A bond spread in research is usually in yield terms, quoted in basis points.
- Fixed vs variable spreads: Some providers advertise fixed spreads during normal conditions, but most markets are variable. What you experience depends on the product and venue.
- Absolute vs percentage: A 2-cent spread on a 10-dollar stock is tiny; the same 2 cents on a 20-cent penny stock is large. Always check spread as a percentage of price.
Whether you trade shares, FX, crypto or bonds, knowing what spread you are paying, how it is measured, and what moves it will help you judge execution quality and the true break-even level of your ideas.