🎯 In 30 seconds: The bid is the best price buyers are offering. The ask is the best price sellers want. The gap is the spread, and you pay it every time you buy and then sell. Liquidity is how easily you can trade without moving the price. A liquid stock has a tiny spread and lots of shares waiting at each price. A thin stock has a wide spread, few shares, and prices that jump when you trade. Large orders in thin stocks suffer slippage: you fill at worse and worse prices. Use limit orders, check volume and size your trades to the market, not to your hopes.
The quote: bid, ask and spread
Every stock has two prices at any moment, not one.
- Bid: the highest price someone is willing to pay right now, and how many shares they want (the bid size).
- Ask (also called the offer): the lowest price someone is willing to sell at right now, and how many shares (the ask size).
- Spread: ask minus bid.
- Midpoint: halfway between the two. It is a fair estimate of the "true" current price.
If you buy with a market order, you pay about the ask. If you sell with a market order, you get about the bid. So if you bought and sold instantly, you would lose the spread. That is a real cost even when the commission is $0.
To compare stocks at different prices, express the spread as a percentage:
spread % = (ask − bid) / midpoint x 100
A $0.02 spread on a $10.00 stock (bid $10.00, ask $10.02, midpoint $10.01) is 0.02 / 10.01 = about 0.2%. The same $0.02 spread on a $200 stock is 0.01%.
Where the best price comes from
A US stock trades on many venues at once: the exchanges, plus off-exchange venues such as wholesalers and alternative trading systems. During regular hours, the best bid and best ask across the exchanges are combined into the national best bid and offer (NBBO). The quote your broker shows is usually the NBBO.
Brokers have a duty to seek the best execution reasonably available for your order. In extended hours, the NBBO is not published and the venues are less linked, so the price you get can differ from venue to venue. How orders move between venues is covered in How the stock market works.
Level 1, Level 2 and market depth
Level 1 data is the basic quote: best bid, best ask, their sizes, last trade and volume. Most free quote screens show this.
Level 2 shows the order book: displayed buy and sell orders at several price levels beyond the best one, often with the venue or market maker for each. This is called market depth. It shows how many shares you could trade before the price moves against you.
Level 2 has limits. It shows only displayed orders. Many orders are hidden or partly hidden, a large share of retail orders execute off-exchange, and orders can be canceled in milliseconds. Treat it as a rough picture of depth, not a promise.
Slippage: what a large order does
Slippage is the difference between the price you expected and the price you actually got. It comes from the spread, from prices moving while your order travels, and from your own order eating through the book.
Worked example (hypothetical, using the book above). You send a market order to buy 2,000 shares. The best ask is $10.02, so you might expect to pay about $20,040. But only 500 shares are offered at $10.02.
| 500 shares at $10.02 | $5,010 |
| 800 shares at $10.04 | $8,032 |
| 700 shares at $10.08 | $7,056 |
| Total for 2,000 shares | $20,098 |
| Average price: $20,098 / 2,000 | $10.049 |
| Slippage vs the $10.02 ask: 2,000 x $0.029 | $58 |
| Cost vs the $10.01 midpoint: 2,000 x $0.039 | $78 |
Now suppose the midpoint rises 1%, from $10.01 to $10.11. At the midpoint, that is a $200 gain on 2,000 shares. But selling 2,000 shares into a book shaped like this one (700 at $10.10, 400 at $10.09, 900 at $10.07) averages about $10.085. Your actual profit is about $71. The round trip cost roughly $129, about two thirds of the move.
The same order in a stock with tens of thousands of shares at each price level would fill near $10.02. Liquidity changes the cost, not the arithmetic.
How to measure liquidity
- Average daily volume (ADV): shares traded per day, averaged over 30 or 90 days. Quote screens show it.
- Dollar volume: ADV x price. 100,000 shares a day of a $2 stock is only $200,000 a day. 100,000 shares of a $100 stock is $10 million.
- Spread %: the formula above. Watch it at different times of day.
- Depth: shares displayed near the best price, from Level 2.
- Float: shares actually available to trade. A small float can make a stock jump violently. See Reading a stock quote.
Thinly traded stocks: the extra risks
A stock that trades only a few thousand shares a day, or trades over the counter, behaves differently from a large, busy one.
- Wide spreads take a big bite on every round trip, as the chart shows.
- Gaps between trades. Price can jump several percent on one small order.
- Exits can vanish. When bad news hits, buyers pull their bids. Your stop order becomes a market order into an empty book.
- Manipulation. Thin stocks are the favorite target of pump-and-dump schemes, because a small amount of buying moves the price. See Scams and red flags.
- Extended hours make all of this worse. The SEC notes that lower trading interest outside regular hours generally means wider spreads, or no quotes at all.
How to trade illiquid names more safely
- Always use limit orders. Never send a market order into a thin book.
- Size to the market. A common rule of thumb is to keep your order to a small fraction of average daily volume, such as 1% or less, so you are not the one moving the price. This is a guideline, not a regulation.
- Price near the midpoint first. Start your limit near the midpoint and move it in small steps if you are not filled. Patience often saves part of the spread.
- Split large orders. Several smaller limit orders over time disturb the book less than one large one.
- Avoid the first minutes after the open and the extended sessions, when spreads are often wider.
- Plan the exit before the entry. Ask how long it would take to sell your whole position at a reasonable price on a bad day.
Try it
Pick three stocks: one very large company, one small company, and one ETF. For each, record the bid, ask, spread %, average volume and dollar volume at three times on the same day: shortly after the open, midday, and near the close. Put them on your watchlist. Then, in the paper portfolio, calculate what a round trip of $1,000 would cost each one in spread alone. Next, see how those costs add up across a year in What trading really costs.
- A stock is quoted $10.00 bid and $10.02 ask. What is the spread as a percentage? Answer: About 0.2% ($0.02 / $10.01 midpoint x 100).
- A stock trades 100,000 shares a day at $2. What is its dollar volume? Answer: $200,000 a day.
- A thin stock shows a 40% gain on your screen because of one trade at a high price. At what price should you value your position? Answer: At the bid, not the last price. The gain is not real until you can sell.
- What two numbers does the chapter say to write down before any trade, and when do they mean a stock is thin? Answer: The spread % and the dollar volume. A spread above about 0.5%, or dollar volume under a few million dollars a day, means treat it as thin.