What is the bid-ask spread?

At any moment, a traded security has two prices: the bid, the highest price someone is willing to pay for it, and the ask (or offer), the lowest price someone is willing to sell it for. The difference between them is the bid-ask spread. A buyer pays the ask and a seller receives the bid, so an investor who bought and immediately sold again would lose the spread. It is a cost of trading that appears on no fee schedule.

The formula

The spread is usually expressed relative to the middle of the two prices:

\text{Spread} = \frac{P_{\text{ask}} - P_{\text{bid}}}{(P_{\text{ask}} + P_{\text{bid}})/2}

Each trade pays about half of it compared with the mid-price, so a round trip — a purchase and a later sale — costs roughly one full spread.

A simple illustration

An ETF is quoted at a bid of €99.90 and an ask of €100.10:

\text{Spread} = \frac{100.10 - 99.90}{100.00} = 0.20\%

Buying €10,000 at the ask and selling at the bid a moment later would return about €9,980: a cost of €20 without any fee involved.

What determines the spread

Liquidity. Heavily traded investments — large stocks, broad ETFs — have spreads of a few hundredths of a percent; small companies and niche ETFs can have spreads of 1% or more.
Market makers. For ETFs, specialized firms continuously quote bid and ask prices, and the spread covers their costs and risk.
Trading hours. Spreads are narrowest when the markets of the underlying securities are open. A European-listed ETF of US stocks usually has a wider spread in the European morning, before US markets open.
Volatility. In turbulent markets, market makers widen their spreads to protect themselves.

How to keep the cost low

Trade during the main trading hours of the underlying market, and avoid the first and last minutes of the trading day.
Use limit orders, which set the maximum price to pay or the minimum to accept, instead of market orders that take whatever price is available.
Prefer liquid investments and listings. The same ETF can have a much narrower spread on one exchange than on another.
Trade less often. Every round trip pays the spread again.

For a long-term investor in broad ETFs, spreads are a minor cost. For frequent traders, and for investors in small or illiquid securities, they can be one of the largest.

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