Bid-Ask Spread

The bid-ask spread is the gap between what buyers are willing to pay and what sellers are willing to accept for a security at any given moment. If AAPL is quoted as $213.45 bid / $213.47 ask, the spread is $0.02 per share. This spread represents an immediate cost — any trader who buys at the ask and immediately needs to sell would receive the bid price, losing the spread on the round trip.

What Determines Spread Width

Spread width is primarily determined by liquidity. Highly liquid stocks with heavy daily volume (Apple, Microsoft, NVDA) trade with spreads of $0.01–$0.02. Small-cap and micro-cap stocks with thin volume may trade with spreads of $0.10–$0.50 or wider. Three factors drive spread width: trading volume (more participants = tighter spreads), price volatility (higher volatility = wider spreads, as market makers demand compensation for the risk of being on the wrong side), and market maker competition (more market makers competing to fill orders = tighter spreads).

Spread in Catalyst Trading

Spreads widen dramatically during and immediately after catalyst events. When an FDA approval fires at 9:42am and a stock gaps up 30%, market makers rapidly widen their spreads to protect themselves from adverse selection — the risk that every order they execute for the next few minutes will be from a better-informed participant. Spreads that were $0.02 before the catalyst can expand to $0.50–$2.00 in the first 60–120 seconds. This is why using limit orders rather than market orders in the immediate post-catalyst period is a best practice for intraday traders.

Spread and Position Sizing

For small-cap and micro-cap catalyst trades, the spread can be a significant percentage of the intended move. A stock trading at $3.00 with a $0.20 spread requires a 6.7% move just to break even on a round trip. This spread cost must be incorporated into position sizing calculations — larger spreads require larger expected moves to justify the trade. Traders focused on small-cap momentum stocks typically operate with wider expected move targets specifically to account for spread costs at entry and exit.

Spread and Market Hours

Spreads are typically wider in pre-market and after-hours trading due to lower liquidity and fewer market participants. For catalyst trades that fire outside regular hours (pre-market FDA approvals, after-hours earnings), the initial execution spreads can be significantly wider than regular-session prices. Limit orders are especially important in extended-hours trading to avoid paying excessive spreads during low-liquidity periods.