Bid, Ask, Spread and Slippage
1. Best bid
The best bid is the highest current displayed price at which a buyer is willing to buy.
It is accompanied by a quantity, which may be smaller than the quantity you want to sell.
2. Best ask
The best ask is the lowest current displayed price at which a seller is willing to sell.
A buyer using a market order generally begins matching against the ask side.
3. Spread
Spread = Best ask - Best bid.
If the bid is Rs 99.90 and ask is Rs 100.10, the spread is Rs 0.20.
The percentage spread is more useful when comparing stocks with different prices.
4. Spread as an immediate cost
A buyer who immediately buys at the ask and immediately sells at the bid loses the spread before other charges.
Frequent trading in wide-spread stocks creates a large hidden cost.
5. Market depth
Market depth shows available quantities at several buy and sell prices.
It is a snapshot, not a promise. Orders can be added, modified or cancelled rapidly.
6. Slippage
Slippage is the difference between the expected or observed price and the actual average execution price.
It can result from market movement, insufficient depth, latency, order size or gaps.
7. Example of slippage
You submit a market buy for 1,000 shares. Only 200 are offered at Rs 100, 300 at Rs 100.20 and 500 at Rs 100.50.
Your average execution becomes Rs 100.31, not Rs 100, before charges.
8. Why order size matters
A small order may execute entirely at the best price. A large order may consume multiple levels of the order book.
The same stock can be liquid for one investor and illiquid for another depending on position size.
9. Volatility and news
During results, major news or market stress, orders can change rapidly and spreads may widen.
Historical liquidity does not guarantee normal execution during exceptional events.
10. Impact cost
Impact cost describes how execution itself moves the average price away from the reference price.
Large institutions often divide orders because revealing and executing the full quantity at once can move the market.
11. Common beginner mistakes
- Buying only because the chart looks good
- A setup may be untradeable at your required quantity.
- Ignoring percentage spread
- A small rupee spread may still be large for a low-priced stock.
- Using visible depth as guaranteed liquidity
- Displayed orders can disappear.
- Calculating risk without slippage
- Real loss can exceed the chart-based estimate.
12. DStreet principle
Liquidity is part of the setup. A theoretical opportunity is useless if you cannot enter and exit responsibly.
13. Beginner checklist
- I check bid, ask and spread.
- I compare order size with available depth.
- I avoid blind market orders in thin stocks.
- I include slippage in risk planning.
- I expect wider spreads during volatile events.
14. Quick knowledge check
Question: What is the spread?
Answer: The difference between the best ask and best bid.
Question: What is slippage?
Answer: The difference between expected and actual execution.
Question: Why can a large order get a worse average price?
Answer: It consumes several price levels.
Question: Is displayed depth guaranteed?
Answer: No.
15. Next lesson
Order Book and Market Depth.