What is the bid/ask spread?

What is the bid/ask spread?

• A. The difference between the buy price (ask) and sell price (bid) of a stock, representing the market maker's profit.
• B. The total annualized return of a stock.
• C. The difference between high and low price of the day.
• D. The commission charged by the broker.

Answer: (A)

The bid/ask spread is the gap between the price at which you can buy a stock now (the ask) and the price you can sell it for immediately (the bid). This spread exists because market makers provide liquidity by standing ready to buy and sell, so the difference compensates them for the risk and service. When you place a market order, you typically buy at the ask and sell at the bid, so the spread is the cost of trading right away. The other ideas—annualized return, the day’s high-low range, or broker commissions—describe different concepts and don’t capture the price gap between buying and selling.

The bid/ask spread is the gap between the price at which you can buy a stock now (the ask) and the price you can sell it for immediately (the bid). This spread exists because market makers provide liquidity by standing ready to buy and sell, so the difference compensates them for the risk and service. When you place a market order, you typically buy at the ask and sell at the bid, so the spread is the cost of trading right away. The other ideas—annualized return, the day’s high-low range, or broker commissions—describe different concepts and don’t capture the price gap between buying and selling.