The difference between the highest price a buyer will pay (bid) and the lowest price a seller will accept (ask) for a share - the primary implicit transaction cost in equity markets.
In equity markets, every share has two prices at any moment: the bid (highest price a buyer is willing to pay) and the ask or offer (lowest price a seller will accept). The spread is the difference. If Apple trades with a bid of USD 189.50 and an ask of USD 189.52, the spread is USD 0.02 (2 cents), or approximately 0.011% of the price - extremely tight for a large-cap stock.
The spread represents the immediate transaction cost of a round trip (buy then sell): a trader who buys at the ask and immediately sells at the bid loses the spread. For liquid large-cap stocks (Apple, Microsoft, SPY ETF), spreads are typically 1–2 cents. For small-cap and micro-cap stocks with low trading volumes, spreads can be USD 0.10–0.50 or wider, representing a significant percentage cost on each trade. During market volatility, circuit breaker halts, or pre/post-market sessions, spreads widen substantially as market makers reduce their capital commitment.
Market makers - firms that continuously quote both bid and ask prices - earn the spread as compensation for inventory risk. High-frequency trading firms now dominate market-making in US equities, keeping spreads extremely tight during normal conditions. Retail traders often receive price improvement (execution inside the quoted spread) through PFOF (Payment for Order Flow) arrangements, though execution quality varies by broker.
For active stock traders, bid-ask spread dynamics explain why limit orders often execute at better prices than market orders, and why trading illiquid stocks or entering at market open (when spreads are typically widest before volume builds) costs more than waiting for spreads to narrow. The spread in equity markets is directly comparable to the spread in forex - both represent an unavoidable cost that must be factored into any short-term trading strategy's profitability calculation.
Worked Example
A trader buys 500 shares of a mid-cap stock quoted at bid USD 42.30 / ask USD 42.45 (spread: USD 0.15, or 0.35%). A market order fills at USD 42.45 (500 × USD 42.45 = USD 21,225). To exit immediately, they would sell at USD 42.30, receiving USD 21,150. Round-trip spread cost: USD 75 before any commission. Compare to Apple (bid USD 189.50 / ask USD 189.52, spread USD 0.02): the same 500-share round trip costs only USD 10 in spread - illustrating why liquidity is a critical consideration in stock selection for short-term active traders.