Bid-ask spread

The bid-ask spread is the difference between the price quoted by investors who want to sell a certain stock or asset (ask price) and those who wish to buy it (bid price). The higher the spread the less liquidity in the market for the asset.

Definition

The bid/ask spread is the difference between the prices quoted by those investors who wish to immediately sell a certain stock (ask price) and those who wish to buy the stock (bid price). In other words, it is the difference in price between the highest price that a buyer is willing to pay for an asset and the lowest price for which a seller is willing to sell it. For example, if the bid price for gold is $1,210 and the ask price for gold is $1,211 then the bid-ask spread in gold is $1.

The size of the spread, or the difference between the two price quotes, is commonly used to determine the liquidity of the asset as well as the transaction cost.

The lower the spread, the more liquid the market. Securities that have a high spread are more volatile and less liquid. However by choosing the right stocks at the right moments investors can take advantage of a high bid/ask spread. As far as gold companies go, a high bid/ask spread may sometimes indicate the early, and risky, yet most attractive stage of a company’s development. Currency is considered the most liquid asset in the world and the bid-ask spread in the currency market is one of the smallest (one-hundredth of a percent). Less liquid assets, such as a small-cap stock, may have spreads that are equivalent to one or two percent of the asset's value.

Here is an example of bid and ask quotes from finance.yahoo.com:

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