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Bid-ask spread — what it is and how it forms. The bid-ask spread is the gap between the highest price a buyer is willing to pay (the bid) and the lowest price a seller will accept (the ask). It’s a fundamental market microstructure metric and represents an implicit trading cost: when you buy at the ask and later sell at the bid, you absorb that spread. Spreads exist because market participants need compensation for providing immediacy and for taking inventory risk; market makers and liquidity providers quote both bid and ask to facilitate trading. The spread width depends on several factors: the asset’s average daily volume (liquidity), the presence and behavior of market makers, the size of the order relative to typical trade size, the asset’s volatility (rapid price moves widen spreads), and market fragmentation (trading across multiple venues). Thinly traded stocks or niche ETFs often show wider spreads; large-cap, heavily traded ETFs and stocks tend to have tight spreads. Time of day also matters: spreads are usually wider at the open and close and tighter during high-volume intraday periods.

Practical implications, order choice, and minimizing cost. For retail investors the bid-ask spread is a real component of trading cost that’s often overlooked compared with explicit commissions. To reduce spread costs use limit orders rather than market orders when possible—limit orders let you set the price and avoid crossing the spread. For small orders in liquid ETFs, spreads are negligible; for large orders or illiquid securities, consider working the order (split across time) or using a broker algorithm. Be cautious of chasing thinly traded niche ETFs with attractive themes but wide spreads—those implicit costs erode returns. When evaluating a fund or stock, check quoted size at the bid and ask and the average spread historically. Finally, remember that spreads are one part of total trading cost, along with commissions, market impact, and timing risk.

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