Real Estate Example
Likened to Real Estate, a seller is asking $1.5 million for their downtown condominium. The buyer is willing to pay $1 million for the property. The “spread” is the difference between the bid and the ask. In this example, the “spread” is $500,000. A transaction only occurs if the seller comes down to meet the buyer’s price, the buyer is willing to meet the seller’s price, or you negotiate something in between.
Stock Market Example
Similarly with stocks, in this simplified example, no trade occurs unless both buyer and seller agree to a price. If both parties (seller and buyer) have entered a “limit order”, meaning they are set on their price and neither party is willing to budge, there will be no trade. The “spread” is the difference in price between the bid and the ask.