Bid-ask spread

The gap between the highest price a buyer is offering and the lowest price a seller will accept at a given moment. It is what an investor pays a market maker, or the other side of the order book, for trading immediately.

A share quoted at ₹199.50 bid and ₹200.50 ask has a spread of ₹1 on a ₹200 midpoint, or 0.5%. If you bought and sold straight away, you'd lose that 0.5% before any tax or brokerage.

Spreads are narrow in large shares that trade heavily and wide in small illiquid ones. They widen everywhere when markets are stressed. For a long-term holder the cost is small. For a strategy that trades often, or for a fund trying to sell a large position in a small company, it can be the largest cost of all, and a backtest that trades at the midpoint ignores it.

Check the spread before the strategy.