Bid-ask spread is the difference between the highest price buyers are willing to pay (bid) and the lowest price sellers will accept (ask). Every trade crosses this spread—you buy at the ask and sell at the bid. The spread represents an immediate cost of trading and a key indicator of market liquidity.
- Bid = highest buyer price; Ask = lowest seller price
- Spread = Ask minus Bid (your immediate trading cost)
- Tighter spreads indicate better liquidity
How Bid-Ask Spread Works
The spread creates an immediate cost:
Order Book Example:
Ask (Sellers):
₹101.00 - 500 shares
₹100.50 - 800 shares
₹100.00 - 1,200 shares ← Best Ask
Bid (Buyers):
₹99.50 - 1,500 shares ← Best Bid
₹99.00 - 1,000 shares
₹98.50 - 600 shares
Spread = ₹100.00 - ₹99.50 = ₹0.50 (0.5%)
If you buy at market: Pay ₹100.00
If you immediately sell: Receive ₹99.50
Instant loss: ₹0.50 per share (the spread)
Quick Reference: Spread by Stock Type
| Stock Type | Typical Spread | Example |
|---|---|---|
| Nifty 50 stocks | 0.01-0.05% | Reliance, TCS |
| Mid-caps | 0.1-0.3% | Trent, Persistent |
| Small-caps | 0.5-2% | Less liquid stocks |
| Penny stocks | 2-10%+ | Very illiquid |
Example: Spread Impact on Trading
Trading Cost Comparison:
| Stock | Price | Spread | Spread % | 100 Shares Cost |
|---|---|---|---|---|
| Reliance | ₹2,900 | ₹1 | 0.03% | ₹100 |
| Mid-cap | ₹500 | ₹2 | 0.4% | ₹200 |
| Small-cap | ₹50 | ₹1 | 2.0% | ₹100 |
For 10 round-trip trades:
- Reliance: ₹2,000 spread cost
- Mid-cap: ₹4,000 spread cost
- Small-cap: ₹2,000 spread cost (but only ₹5,000 position!)
Bid-ask spread is the gap between buy and sell prices—your immediate trading cost. Tighter spreads mean lower costs. Liquid large-caps have tiny spreads; illiquid small-caps have expensive spreads that eat into profits.
Factors Affecting Spread
Liquidity
More buyers and sellers = tighter spreads. High-volume stocks have minimal spreads.
Volatility
Fast-moving markets have wider spreads. Market makers increase spreads to compensate for risk.
Time of Day
Spreads are widest at open and close, tightest mid-day when liquidity is stable.
Stock Size
Large-caps have tighter spreads than small-caps due to more trading activity.
News Events
Earnings, announcements, and macro events widen spreads temporarily.
Trading the Spread
Use Limit Orders
Place orders inside the spread to avoid paying full spread. May not fill, but costs less when it does.
Avoid Illiquid Stocks
Wide spreads make profitable trading difficult. Stick to liquid names.
Check Spread Before Trading
Look at the order book. If spread is abnormally wide, wait or reconsider.
Time Your Trades
Avoid trading at open when spreads are widest. Mid-session offers better spreads.
Common Mistakes
-
Ignoring spread costs – Focusing only on brokerage while spreads cost more.
-
Market orders in illiquid stocks – Wide spreads mean terrible fills.
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Trading during volatility – Spreads spike during fast moves.
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Scalping wide-spread stocks – Small profits get eaten by spread costs.
How JournalPlus Tracks Spread Impact
JournalPlus can log your fill prices versus mid-price, helping you understand how much spread costs are affecting your actual trading performance.
