What is the 'bid-ask spread'?

The bid-ask spread refers to the difference between the highest price a buyer is willing to pay for a stock (the bid price) and the lowest price a seller is willing to accept (the ask price). This spread is a key indicator of the market liquidity for a particular security; narrower spreads typically signify a more liquid market, as there are more buyers and sellers readily available to transact at similar prices.

Understanding the bid-ask spread is essential for traders as it impacts the overall cost of trading. A smaller spread indicates that the transaction costs will be lower, which is favorable for a trader looking to buy or sell quickly. On the other hand, a larger spread may suggest a less active market, leading to higher costs for entering or exiting a position.

This concept is fundamental in trading transactions and is crucial for traders to assess the pricing dynamics of securities they plan to trade.