Every trade has two prices
When you place a market order, you don't trade at the price. You trade at a price — the best one currently available on the other side of the book.
- Bid — the highest price someone is willing to buy at right now.
- Ask (or offer) — the lowest price someone is willing to sell at right now.
The spread is the gap: .
If the bid is $150.00 and the ask is $150.05, and you send a market buy, you pay $150.05. If you immediately turn around and sell, you get $150.00. That five-cent difference is a real cost you eat before the trade even moves.
The order book
Behind every quoted price sits a stack of limit orders at various prices and sizes. The order book is a live ledger of all resting buy and sell interest. Bids stack below the current price; asks stack above it.
Drag the spread slider to see what happens when liquidity thins out.
Observations:
- Tight spread → deep liquidity, easy entry/exit. Think Apple, SPY, AAPL — spreads often a single penny.
- Wide spread → thin book, high cost to trade. Think micro-caps, after-hours, illiquid options.
- The top of book (best bid / best ask) is what most platforms quote as "the price." Everything below is depth.
Spread as a cost
The spread is not a fee on your brokerage statement, but it is a real drag on returns. Every market order crosses the spread. If you trade frequently or in size, spread costs compound fast.
Penny-wide spread. Deep liquidity, tight execution.
| Action | Price | Shares | Total |
|---|---|---|---|
| Buy (market) | $189.25 | 100 | $18,925.00 |
| Sell (market) | $189.24 | 100 | $18,924.00 |
| Spread cost (round-trip) | −$1.00 (0.01%) | ||
Rule of thumb: if the round-trip spread cost is larger than your expected edge on the trade, you probably shouldn't take it. A $0.22 spread on a $7 stock is ~3% — you need a 3% move just to break even.
What widens the spread?
| Condition | Why |
|---|---|
| Low volume / illiquid stock | Fewer market makers competing → wider quotes |
| After-hours / pre-market | Most participants are offline |
| High volatility / news events | Uncertainty → makers widen to protect themselves |
| Large order size | You exhaust the top of book and "walk" deeper levels |
What tightens it?
| Condition | Why |
|---|---|
| High volume / liquid stock | Competition among market makers drives the spread toward the minimum tick |
| Exchange incentives | Maker-taker rebates reward posting tight limit orders |
| Algorithmic market makers | HFT firms continuously update both sides of the book |
Slippage
When your order is larger than the size sitting at the best price, the remainder fills at the next level, then the next, and so on. The difference between your expected price and your actual average fill is slippage.
Slippage turns a one-penny spread into a five-cent problem. It's worst when:
- You use market orders in thin books
- You chase entries during fast-moving news
- You trade options with wide natural spreads
The fix: limit orders. They cap your worst-case price. The trade-off is you might not get filled. We'll explore that in the next lesson.
Key takeaways
- Every trade crosses the spread — it's a hidden cost, not a fee.
- The tighter the spread, the cheaper it is to trade. Spread is a proxy for liquidity.
- Slippage adds to spread cost when your order is large relative to the book.
- Check the spread before you trade, not after. If it's wide, use a limit order or walk away.
Quick check
The bid is $50.00 and the ask is $50.10. You buy 200 shares at market. What is your immediate spread cost?
What you now know
- Bid is the highest price someone will pay; ask is the lowest price someone will sell at. Spread is the gap.
- Half-spread is the minimum round-trip tax you pay when crossing the book in both directions.
- Spread widens with low liquidity, earnings/news, and pre/post-market hours.
- Market orders take the spread; limit orders provide liquidity and avoid it — but may not fill.
- Large orders walk the book, consuming liquidity at progressively worse prices. That's slippage, and it scales with order size relative to displayed depth.
Next: Order Types — when to use market vs. limit vs. stop vs. stop-limit, and which one each context actually wants.