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In a liquid market, such as those for stocks and bonds, there are many buyers and sellers willing to pay and accept different prices.  An offer from a potential buyer for an item is called a bid.  An offer from a potential seller is called an ask.  The market price is the price of the last sale, when a bid equaled an ask.  At any moment, the difference between the highest bid and the lowest ask is called the bid/ask spread.  For example, if the most eager buyer is willing to pay $20.50 for a share of Microsoft, and the most eager seller is willing to accept $20.52, then the bid/ask spread is $0.02.

An investor who decides to place a market order for Microsoft will pay the ask, $20.52 in this example.  Let's say that a week later, the stock's bid and ask prices have returned to the same levels, and the investor decides to sell their shares, again placing a market order.  They will receive the bid price, which is $20.50.  Thus, even though the market has not changed, the investor will have paid $0.02 per share in bid/ask spread.  This expense is in addition to any commissions the investor may pay their broker.

Foreign exchange markets are the most liquid, and often have bid/ask spreads of a hundredth of a cent.  The municipal bond market is notoriously illiquid, and can have bid/ask spreads of several percent of the value of the bonds.

In less liquid markets like those for bonds, individuals may pay a higher bid/ask spread than institutions, which are able to negotiate more favorable terms with their higher volume.

==Links==
*[http://www.google.com/search?hl=en&q=define%3A+bid%2Fask+spread Google definitions]

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[[Category:Glossary]]