Reading a quote
There is no single price. There is what a buyer will pay, what a seller will take, and the gap between them — which you pay every time you trade, whether or not you notice it.
Chapter 7 · Intermediate
Ask what a share costs and you get one number. There are always at least two.
Bid and ask
Bid — the highest price anyone is currently willing to pay. This is what you get if you sell right now.
Ask (or offer) — the lowest price anyone is currently willing to accept. This is what you pay if you buy right now.
The ask is always higher than the bid. If it were not, the two orders would have matched and both would be gone.
The last traded price — the number usually shown as "the price" — is neither. It is the price of a trade that already happened, and you cannot deal at it.
The spread is a cost
The gap between bid and ask is the spread, and it is a real cost that never appears on a contract note.
Buy at the ask and immediately sell at the bid, and you lose the spread without the price having moved at all. It is the cost of a round trip, and it is paid in full whether you hold for an hour or a decade.
What a round trip costs before the price moves
A flat fee per order, as most discount brokers charge.
Buy at the ask, sell at the bid, and you are down
₹50
- The spread
- 0.02%₹0.10 a share
- Cost of the spread
- ₹10
- Brokerage, both sides
- ₹40
The price has to move 0.1% in your favour before this trade is worth nothing at all. Here brokerage is the larger cost, which is what a liquid stock looks like. Try a wider spread and watch that reverse.
Two things that widget makes obvious.
In a liquid stock the spread is trivial. A one-paisa gap on a ₹500 share is 0.002%, which is not worth a thought.
In an illiquid one it dominates everything. A ₹3 gap on a ₹90 share is over 3% each way. You would have to be right by more than 6% before breaking even — before brokerage, taxes or being wrong.
Beginners often compare brokers on brokerage and never look at the spread. In thin stocks, the spread is usually the larger cost by a wide margin.
Depth, and why it matters more than the top line
A quote shows the best bid and ask. The order book shows the depth — how many shares are available at each price level, and at the levels behind it.
Depth is what decides whether your order moves the price. If the best ask has 50 shares and you want 5,000, you will take the 50, then the next level, then the one after — walking up the book and paying more with each step. Chapter 5 called this the danger of a market order in a thin stock; depth is the thing that makes it dangerous.
A stock can look liquid at the top and be hollow underneath. The top line tells you the price of a small trade, not of yours.
Reading liquidity
Four signals, roughly in order of usefulness:
The spread, as a percentage of the price. Small is liquid. This is the single best quick test.
Depth at the first few levels. Thousands of shares on each side is healthy; a handful is not.
Traded volume today, against its own normal. Not against other stocks — against what this stock usually does.
How often the price changes. A price that has not moved in twenty minutes is telling you something.
What liquidity buys you
It is easy to treat liquidity as a technicality. It is not. It is the answer to a simple question: can I get out at a price close to the one on the screen?
In a liquid stock, yes, in ordinary sizes, most of the time.
In an illiquid one, possibly not — and the moment you most want to sell is exactly the moment everyone else does too, which is when a thin book becomes an empty one. Chapter 9 of Finance 101 called that the difference between volatility and permanent loss; illiquidity is one of the mechanisms that turns the first into the second.
The point
The bid is what you can sell at, the ask is what you can buy at, and the gap is a cost you pay on every round trip. In liquid stocks it is noise. In thin ones it is often larger than every other cost combined.
Check yourself
4 questions. Every answer is explained afterwards, including the ones you get right — guessing correctly is not the same as knowing. Score 70% or more and the chapter is marked done.
Question 1 of 4
0 of 4 answered. You can submit with questions unanswered — they simply score zero.
Now do it with your own numbers
Find the bid and ask for a large company and for a small one. Work out the spread as a percentage in each case, then double it — that is what a round trip costs you before any brokerage.
Compare that number to the brokerage you were worrying about. In thin stocks the spread is usually the larger cost by far.