What it means
Liquid markets in busy hours have tight spreads. Thin markets, quiet hours and big news make them wider.
Example
Bid 50.10, ask 50.14: the spread is 0.04. On 100 shares, crossing it costs $4.
In practice
The spread is the price of trading immediately. A market buy fills at the ask and could only be sold straight back at the bid, so every trade starts slightly negative by the width of the spread.
Traders keep it small by sticking to liquid instruments and active hours. For short-term trading, a spread that is a large fraction of the stop distance makes a strategy hard to run profitably.
What to watch for
Spreads are not fixed. They widen at the daily forex rollover, around news and in the minutes after a market opens, which can trigger stops and make entries much more expensive than usual.
Related terms
4 terms- BidThe highest price a buyer is willing to pay right now. You sell at the bid.
- AskThe lowest price a seller will accept right now. You buy at the ask.
- Market makerA firm that quotes both a buy and a sell price all day and earns the spread between them.
- CommissionThe fee your broker charges per trade, contract or share.