Term · Liquidity & Trading

Bid-Ask Spread

Core

In briefThe bid-ask spread is the distance between the best bid and the best ask and serves as a liquidity indicator. For thinly traded small caps it acts as a hidden but real cost factor on entry and exit.

Definition

The difference between the highest bid and the lowest ask; an indicator of liquidity.

How it is calculated

Formula. Bid-ask spread = best ask − best bid.

Why it matters for small caps

For thinly traded small caps, often a hidden but real cost factor on entry and exit.

Common misreadings

It is ignored as a mere marginal figure, even though a wide spread noticeably reduces the actual return on small positions.

In the process

→ Used in Step 1 – Quick test

Frequently asked

What is the bid-ask spread?

It is the distance between the highest bid and the lowest ask. The tighter the spread, the more liquid a stock generally is.

How does the spread affect the return?

Anyone who buys and sells again crosses the spread twice and effectively pays it as a cost. For small positions, this can noticeably reduce the net return.

Why is the bid-ask spread often underestimated?

It is ignored as a marginal figure, even though it can be high for illiquid stocks. Especially with small caps, it should be considered before every order.