The bid-ask spread and slippage

The lesson in plain words

The same lesson as the slides above, written out in full.

1. Two prices at once

Welcome. Every price you see is really two prices at once: what buyers will pay and what sellers will take. The small gap between them is the spread, and learning to see it is the first step to trading with your eyes open.

• The bid is the highest price buyers are currently willing to pay.
• The ask, or offer, is the lowest price sellers will currently accept.
• The spread is the gap between them, and it never fully disappears.
• You almost always buy at the ask and sell at the bid, not at the middle.
• A tight spread shows a busy, competitive market for that name.

A quick note: This is financial education only, not financial advice. The prices here are illustrative and simplified to teach the idea, not a recommendation to trade any security.

2. The spread is a cost you pay

Think of the spread as an entry fee. The moment you buy at the ask, you could only sell back at the lower bid, so you begin a touch behind. It is small on liquid names and easy to ignore, but it is always there, and it adds up across many trades.

• Buying at the ask and selling at the bid means you start every trade slightly underwater.
• That built-in gap is a round trip cost you pay just to get in and out.
• The price has to cover the spread before you even reach breakeven.
• On a wide spread, this hidden cost can quietly outweigh commissions.
• It applies to options too: even a long put used for a bearish view has its own bid and ask to cross.

3. Liquidity moves the gap

Liquidity is simply how many willing buyers and sellers are standing by. When a name trades heavily, their competition presses the bid and ask close together. When trading is thin, or the tape is moving fast, that crowd thins out and the gap can widen dramatically.

• Liquidity is how easily you can trade without moving the price.
• Heavily traded names have many resting orders, so the spread stays narrow.
• Thinly traded names have few orders, so the spread gaps wide.
• Spreads also widen during volatile or fast moving conditions.
• Off hours and around news, even familiar names can turn illiquid.

4. When size meets a thin book

Slippage is what happens when your order is bigger than the amount resting at the best price. To fill it all at once, the order climbs to the next level, then the next, and your average price drifts away from where you aimed. Sizing to the available depth and leaning on limit orders keeps that drift small.

• Slippage is the difference between the price you expected and the price you actually got.
• A market order large enough to clear the best price walks the book into worse levels.
• Your average fill ends up above the best ask when buying, or below the best bid when selling.
• Crossing a wide spread with size is where slippage bites hardest.
• A limit order caps the price you accept, trading certainty of price for less certainty of a fill.