Bid-Ask Spread and Liquidity

What this unit covers

Learn what the bid-ask spread is and why it is a real cost you pay on every trade, wider on illiquid stocks and narrower on liquid ones.

By the end you will be able to

• Explain why the bid-ask spread is a real cost, separate from brokerage.
• Calculate a spread as a percentage of trade value and compare it across two stocks.
• Explain how liquidity narrows or widens a stock's spread.

How it starts: The Price That Is Never One Number

1. You check a stock quote before buying, and see two prices, not one.
2. One share shows a 1 rupee gap, another shows a 0.50 rupee gap.
3. Which gap actually costs you more to buy and sell back?

Words you will meet

Bid-ask spread

The gap between the highest price a buyer offers and the lowest price a seller will accept.

Liquidity

How many buyers and sellers are actively ready to trade a stock right now.

In this module: Market Microstructure

1. Orders and Execution
2. Bid-Ask Spread and Liquidity (this unit)
3. Market Depth
4. Price Discovery