The Bid-Ask Spread is a critical concept in stock trading, widely used as an indicator of the liquidity of the asset. It refers to the difference between the highest price that a buyer is willing to pay for an asset (the bid) and the lowest price at which a seller is willing to sell the asset (the ask).
For example, if the bid price for a stock is ₹10 and the ask price is ₹10.05, the bid-ask spread would be ₹0.05. This gap represents the profit that a market maker (financial institutions that buy and sell a particular stock) can potentially make from the transaction.
A narrower bid-ask spread implies a more liquid market where there are plenty of buyers and sellers, leading to easier transactions. On the contrary, a wider bid-ask spread indicates a less liquid market, which means a higher transaction cost for investors or traders, as they will need to pay more to execute trades.
Understanding the bid-ask spread is crucial for investors when placing their orders as it provides insights into the supply and demand, liquidity, and depth of the market for a particular stock.
