Bid-offer spread

The bid-offer spread is the difference between the prices at which shares can be sold and bought. In a matched bargain system this is the difference between the best bid offer prices in the order book. In a quote driven system it is the difference between the best and worst market makers' prices.

This difference is, in effect, part of the costs of investing in much the same way that brokers commissions are. Bid-offer spreads are also where market makers make their profits, which is the reward they get in return for improving the liquidity of the securities in which they make a market.

From an investor's point of view, the spread is an extra cost, like the broker's commission. It needs to be regarded as such, especially when considering the costs of very active trading strategies.

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