“Bid/ask spread”

definition

In foreign exchange, the “bid/ask spread” or “buy /offer spread” – more commonly known simply as the “spread” – is the difference in price by which the “bid” price exceeds the “ask” price of a specific asset (such as a currency, stock, option or futures contract).

The “bid” price is the price that a buyer is willing to pay to acquire the currency they seek. Conversely, the “ask” price is the minimum that the seller is willing to accept before agreeing to sell their currency.

The bid/ask spread can be amended by market makers, like banks and foreign exchange brokers, to achieve higher compensation for themselves and to cover costs therein, such as transaction cost or inventory holding cost. It effectively functions as a mark-up.

The spread can also be an indicator of the liquidity of the market. A liquid market, such as the currency market, normally has very low spreads, while less liquid assets like stocks of unlisted companies might have higher spreads.