Spread in the stock market refers to the difference between two prices, rates, or yields. Most commonly, it represents the gap between the bid price (the highest price a buyer is willing to pay) and the ask price (the lowest price a seller is willing to accept). The spread acts as a key indicator of market liquidity and trading costs.

In liquid markets, where trading volumes are high and price movements are frequent, spreads tend to be narrow, meaning the difference between the bid and ask price is minimal. Conversely, in illiquid markets or less frequently traded securities, spreads are wider, indicating lower liquidity and higher transaction costs. Thus, a smaller spread generally benefits investors, as it reduces the cost of entering and exiting trades.

Spreads also exist beyond equities — for instance, in bond markets (yield spread between different bonds), futures (spread between contract prices), and currency trading (difference between exchange rates). Each type of spread provides insights into market conditions, risk, and investor sentiment.

Market makers and dealers earn profits through the spread, serving as intermediaries to provide liquidity. For investors, understanding spreads helps in evaluating the efficiency and cost-effectiveness of their trades. A narrow spread typically reflects a well-functioning, competitive market, while a wider spread may signal volatility or low participation.

In summary, the spread is a fundamental concept that influences pricing, trading strategies, and market transparency. Investors should always consider the bid-ask spread before executing trades, as it directly affects the overall profitability and efficiency of investment decisions.