The Bid-Ask Spread — the Toll You Pay

Two prices always

At any moment there are two prices: the bid (highest someone will pay from you) and the ask (lowest someone will sell to you). Buy at the ask, sell at the bid — you cross the spread every round trip. Spread is the market-maker's toll plus compensation for risk.

What makes spreads wide

Spreads widen when: the stock is small or thinly traded, volatility spikes, market-makers step back (crises, before earnings), or outside regular hours. Apple might trade at a $0.01 spread; a small biotech at $0.15 on a $3 stock — that is 5% gone before you start.

Practical rules

1) Check the spread before trading anything — it is an instant liquidity test. 2) Use limit orders in anything but mega-caps. 3) Avoid market orders in the first and last 15 minutes and in pre/post market. 4) If the spread is more than ~0.3% of price, ask yourself whether the trade is worth the toll.

Sources

• Bid-Ask SpreadInvestopedia
• Understanding Order ExecutionSEC.gov