What Is the Bid-Ask Spread?

Every time you buy a share or an ETF on an exchange, you pay a slightly higher price than the price shown as the current “value” of that asset. When you sell, you receive slightly less. The difference is called the bid-ask spread — and it exists on every traded asset, from FTSE 100 shares to foreign currency. It is one of the unavoidable costs of investing, but the size of the spread varies enormously depending on what you are trading.

How the spread works

When you look up the price of a share or ETF, what you actually see is two prices sitting side by side:

• The bid price — the highest price a buyer in the market is currently willing to pay
• The ask price (sometimes called the offer price in the UK) — the lowest price a seller is currently willing to accept

The bid is always lower than the ask. The gap between them is the spread.

When you place a buy order at the market price, your trade executes at the ask — the seller’s price. When you sell, you receive the bid — the buyer’s price. So if you bought a share and immediately sold it again without the price moving, you would lose the spread. It is, in effect, the cost of getting into and out of a position.

These prices are maintained by market makers — financial institutions, often employed by or connected to brokers, that continuously quote both a bid and an ask for securities. Market makers profit from the spread: they buy at the bid and sell at the ask, capturing the difference on every transaction. By always standing ready to trade, they provide the liquidity that allows ordinary investors to buy and sell quickly without waiting for a matching counterparty.

How it is calculated

Example: bid 498p, ask 502p

That 0.80% is the amount you are “down” the moment your buy order fills, before any market movement.

What drives the size of the spread

Spreads are not fixed. They widen and narrow depending on several factors:

Liquidity is the dominant driver. Liquid markets — where large numbers of buyers and sellers are actively trading — have narrow spreads because market makers face less risk in quoting tight prices. Major global ETFs tracking indices like the S&P 500 trade in huge volumes, and their spreads are often fractions of a per cent. Illiquid assets, such as small-cap stocks or thinly traded bonds, can have spreads of 1% or more.

Volatility pushes spreads wider. When prices are moving sharply and unpredictably, market makers face greater risk that the price will move against them between quoting a price and completing a trade. To compensate, they quote wider spreads.

Trading volume matters independently of liquidity. Even a liquid stock can see its spread widen at quieter times of day — early morning before full market participation, or in the final minutes before close — because fewer participants are actively quoting competing prices.

Asset class has a structural effect. Foreign exchange markets are among the most liquid in the world; major currency pairs can have spreads of 0.01% or less. Shares of large, well-established companies sit in the middle. Smaller or more specialised instruments — small-cap equities, exotic bonds, certain commodities — tend toward the wider end.

Spreads and ETF investing

ETF investors encounter the bid-ask spread every time they place a trade. Because ETFs trade on an exchange like a share (unlike unit trusts, which are priced once a day directly with the fund manager), the spread is a real cost at the point of each transaction.

For a buy-and-hold investor making infrequent trades, the spread on a major-index ETF is usually small enough to be a minor consideration — a large-cap ETF tracking the S&P 500 or MSCI World might have a spread of 0.03%–0.10%. But it adds up in two scenarios: if you trade frequently, you pay the spread each time; and if you invest in a less liquid ETF (such as one tracking a narrow sector or emerging market), the spread itself may be materially larger.

A few practical points for UK ETF investors:

• Check the spread before trading, especially for less mainstream ETFs. Your broker’s order screen typically shows both bid and ask prices before you confirm
• Limit orders let you specify the maximum price you are willing to pay (or minimum you will accept), which protects against paying a wider spread than expected — particularly useful in fast-moving markets or with less liquid instruments
• Trading near the open or close of market hours can mean wider spreads; mid-session is generally when liquidity is highest and spreads are tightest
• The spread is separate from, and in addition to, other ETF costs such as platform charges and the fund’s own ongoing charge figure (OCF)

For a fuller look at how ETF costs compare to cash savings over time, see ETFs vs Savings Accounts: How They Compare in the UK.

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Sources

• Bid-Ask Spread — Investopedia — definition, calculation, factors affecting spreads, and the role of market makers
• Market Maker — Investopedia — how market makers provide liquidity and profit from the bid-ask spread