Bid, Ask and Market Makers

What the bid and ask prices mean, why the gap between them is a hidden cost of trading, and how market makers keep markets running.

If you look up a share price, you might see a single number. But at any moment, there are really two prices: the price buyers are offering and the price sellers are asking.

Bid and ask

The bid is the highest price a buyer is currently willing to pay.
The ask, also called the offer, is the lowest price a seller is currently willing to accept.

The difference between them is the bid-ask spread. If the bid for a share is 99.90 and the ask is 100.10, the spread is 0.20.

The spread as a cost

If you buy a share and immediately sell it, you buy at the ask and sell at the bid, losing the spread. The spread is therefore a hidden trading cost, on top of any broker fees. For large, heavily traded companies, spreads are tiny, often a fraction of a percent. For small, rarely traded shares, spreads can be wide.

Market makers

Market makers are firms that stand ready to buy and sell continuously, posting both bids and asks. They earn money from the spread: buying at the bid and selling at the ask. In return, they provide liquidity, making sure there is usually someone to trade with.

Market makers take risks. If prices move against them while they hold shares, they can lose money. Wider spreads compensate them for greater risk, such as in volatile markets or for shares with little trading.

A currency exchange booth

At an airport currency booth, the board shows two rates: the rate at which the booth buys dollars and a higher rate at which it sells them. The booth profits from the difference, just like a market maker. At airports, where travellers have few alternatives, the spread is often very wide, making it an expensive place to change money.

What affects spreads

Trading volume: more trading usually means narrower spreads.
Volatility: uncertain markets widen spreads.
Competition: more market makers competing narrows spreads.
Market hours: spreads are often wider at the open and close.

Thinking the quoted price is what you will pay

The price shown in news reports is often the last traded price. When you actually buy, you usually pay the ask, and when you sell, you usually receive the bid. For thinly traded shares, the difference can be significant.

Key takeaways

The bid is the highest price buyers offer; the ask is the lowest price sellers accept.
The bid-ask spread is a hidden cost of trading.
Market makers provide liquidity and earn the spread in exchange for taking risk.
Spreads are narrower for heavily traded shares and wider in volatile markets.