What the bid-ask spread is

Every listed share has two prices at any moment, not one. The bid is the highest price someone is currently willing to pay. The ask (or offer) is the lowest price someone is currently willing to sell at. The gap between them is the bid-ask spread.

The “price” you see quoted on an app is usually the last traded price — what the most recent buyer and seller agreed on. It’s history. If you place a market order now, you’ll buy at the ask or sell at the bid, and the spread is the toll for trading immediately instead of waiting.

Liquidity is how much you can trade without moving that price much. A liquid stock has many orders stacked close to the best bid and ask; a thin (“illiquid”) one has a handful, spread far apart. The spread tells you what a small order costs. For a bigger order you need a second number, impact cost, because your order eats through several price levels.

The formula

Spread (Rs)            = Best ask − Best bid
Mid price ("ideal")    = (Best ask + Best bid) / 2
Spread (%)             = Spread / Mid price × 100

Impact cost (%)        = (Your average fill price − Mid price) / Mid price × 100    for a buy
                       = (Mid price − Your average fill price) / Mid price × 100    for a sell

That impact-cost definition — the mark-up over the mid-point of the best bid and ask for an order of a given size — is the one NSE uses (NSE, impact cost). Notice it depends on order size: a stock doesn’t have “an impact cost”, it has one for ₹1 lakh, another for ₹10 lakh, and so on.

Worked example: a thin order book for Desi Bites

Desi Bites Foods is our fictional small listed company. Here is a hypothetical snapshot of its order book: the best five bids and asks, the view any trading app shows under “market depth”.

Bid (buyers) Shares Ask (sellers) Shares
₹628 150   ₹632 100
₹625 200   ₹636 250
₹620 400   ₹640 300
₹615 300   ₹648 500
₹610 500   ₹655 400

Step 1 — the spread. Best bid ₹628, best ask ₹632, so the spread is ₹4. The mid price is ₹630, and the spread is 0.63% of it.

Step 2 — a small buy. Buy 100 shares at market and all of them fill at ₹632. Impact cost = 0.32% — exactly half the spread, the least a market buy can cost.

Step 3 — a bigger buy. Buy 600 shares at market (about ₹3,82,200). The order clears the first ask level and keeps going:

Filled at Shares Value (₹)
₹632 100 63,200
₹636 250 1,59,000
₹640 250 1,60,000
Average ₹637 600 3,82,200

Impact cost = (637 − 630) ÷ 630 = 1.11%, or ₹4,200 more than the same shares would cost at the mid price.

Step 4 — sell them straight back. The order walks down the bids to an average of ₹623.67: impact cost 1.01%. The round trip loses ₹8,000 (2.09% of the purchase) before brokerage, tax or charges, and without the price having “moved” at all.

The screen said ₹630-ish the whole time. The order paid ₹637 and got ₹623.67 back.

For contrast: how much trades in Britannia

We don’t have Britannia’s historical order book, so here’s the observable that stands in for depth: how much changes hands each day. Across 246 NSE sessions in FY26 (close × volume from Yahoo Finance, 1 April 2025 – 30 March 2026; one zero-volume data row dropped), Britannia’s median day saw about ₹156.1 crore traded on the NSE alone; a quiet day (10th percentile) about ₹90.8 crore. Our hypothetical Desi Bites book shows 1550 shares on offer across five levels, worth about ₹10 lakh in all. A ₹3.8 lakh order is a rounding error in the first and takes 38.7% of the shares visibly on offer in the second. For illustration only.

Turnover isn’t the same as spread, but they travel together: heavily traded stocks tend to have tight spreads and deep books, because many participants keep quoting on both sides. This is also why the volume post treats volume as information about how many people are behind a move.

🧒 Explain it like I'm 10 (optional — skip if this is already clear)

A shop buys old cricket bats for ₹400 and sells them for ₹450. If you sell your bat and buy it straight back, you’re ₹50 poorer and still have the same bat. That ₹50 is the spread.

Now imagine the shop only has one bat at ₹450, and the next one it can find costs ₹500, and the one after that ₹560. If you want three bats, you don’t pay ₹450 each. That’s impact cost.

Common mistakes

  • Treating the last traded price as the price you’ll get. On a thin stock the last trade may be minutes or hours old. The ask is what you’ll pay; the bid is what you’ll get.
  • Using market orders in illiquid stocks. A market order says “fill me at whatever the book offers”. A limit order caps the price, at the cost of maybe not filling. Neither is right or wrong in general; not knowing which one you placed is the mistake.
  • Judging liquidity from the spread alone. A ₹0.05 spread with 10 shares on each side is not liquid for a 5,000-share order. Look at the depth behind the best prices, or the impact cost for your size.
  • Backtesting on closing prices. A strategy that trades a small, thin stock at the close every day ignores the spread and impact it would actually pay. On liquid large caps that cost is small; on thin stocks it can be larger than the edge being tested.

Takeaway: the price on the screen is where the last trade happened; the price you get is the other side of the order book, and for a big order in a thin stock it gets worse the more you trade. Check the spread and the depth before you check the price.