Bid/Offer Spread

Submitted by Share Trading on 10 March, 2010 - 19:57

The bid/offer spread refers to the difference between the bid price and offer price. To be more specific, it is the difference between the highest amount that a buyer is willing to spend for an asset and the lowest price/amount in exchange of which the seller is willing to sell it. “Bid price” is the selling price while the “offer price” is the purchase price.

For instance, if the bid price is $25 and the offer price is $26, then the bid/offer spread is going to be $26 - $25 = $1.

Bid/offer Spread- from the Perspective of the Stock Market

In case of the stock market, if you ask a broker about the price in which the share of a company is being traded in the market, he will give you two prices: one is the bid price at which you can sell your shares and the other one is the offer price at which you can purchase them. The difference between these two prices is the spread. Always remember, the bid price is always going to be lower than the offer price. Traders who operate as the wholesalers in the stock market make profit by purchasing the stocks at the bid price and selling them in the offer price.

The spread size may differ from one asset to another depending on the liquidity of the asset. More liquidity leads to smaller spreads. This is why the currency market comes up with narrower bid/offer spread since the market is highly liquid while assets like penny dreadful stocks involves wider spreads due to less liquidity.

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