Bid-Ask Spread
Definition
The bid-ask spread is the difference between the highest price buyers will pay and the lowest price sellers will accept — it's an immediate, invisible transaction cost on every trade you make.
Example
“That illiquid small-cap had a 40-cent spread on a $6 stock. That's a 6.7% round-trip cost before the stock moves an inch — not a trade worth taking.”
Detailed Explanation
The spread is the market's built-in fee for immediate execution. Market makers and specialists earn money by buying at the bid and selling at the ask, pocketing the difference. As a trader, every time you enter with a market order and exit with a market order, you pay the spread twice — once on entry, once on exit. On a liquid large-cap with a 1-penny spread, this is negligible. On a thinly-traded small-cap with a 30-cent spread, it's a significant headwind that needs to be overcome before you're even at breakeven.
This is why professional day traders are almost obsessive about liquidity. They stick to stocks with tight spreads and deep order books because every cent of spread compression goes directly into profitability. A scalping strategy that works on a stock with a 2-cent spread may completely fall apart on a stock where the spread is 15 cents. The strategy isn't broken — the economics of execution just changed.
You can also use limit orders to avoid paying the spread. By placing a buy limit at the bid instead of hitting the ask, you wait for a seller to come to you. The risk is your order may not fill, especially in fast markets. For day traders in active stocks, the trade-off between fill certainty (market order) and price improvement (limit order) is a constant judgment call based on how urgently you need to be in the trade.