Glossary · UK
What is Bid-Offer Spread?
The gap between the price at which an investment can be sold (bid) and the higher price at which it can be bought (offer), representing an implicit trading cost.
Full Definition
The bid-offer spread (also called the bid-ask spread) is the difference between the bid price -- the price at which a buyer is currently willing to purchase a share, fund or other investment -- and the offer (or ask) price, the price at which a seller is currently willing to sell, with the offer price always somewhat higher than the bid price for a given investment at any moment. Anyone buying an investment at the offer price and immediately selling it back at the bid price would make an instant loss equal to the spread, which is why the bid-offer spread is considered an implicit trading cost, separate from and in addition to any explicit dealing charges, platform fees or stamp duty payable on a share purchase, and is one of the costs an investor effectively pays for the ability to trade an investment immediately rather than waiting to find a matching buyer or seller directly. Spreads are generally narrow (often a small fraction of a percent) for large, heavily traded investments such as major UK company shares or popular tracker funds, where many buyers and sellers are active at any given time, but can be considerably wider for smaller, less frequently traded shares, some investment trusts, and certain overseas or specialist funds, where fewer participants are trading and market makers require a larger spread to compensate for the extra risk and cost of holding an inventory of a less liquid investment. Because the spread is paid every time an investment is bought and then eventually sold, frequent trading in and out of wide-spread investments can meaningfully erode returns over time compared with a more patient, lower-turnover approach, which is one of several practical reasons long-term investors are generally advised to trade less often rather than more.