# Bid, ask, spread and liquidity > Read the two prices on every screen, see why thin markets and odd hours cost more, and what a big market order does to a thin order book. - Course: [Trading Basics: How It Works, How Not to Lose Everything](https://productovi.com/courses/trading.md) - Module: How does a market work under the hood? - Lesson 7/32, ~29 min - Source: https://productovi.com/courses/trading/bid-ask-liquidity ## Two prices, always **Alex Tutor:** Back on your Pebble practice account, let's read the two numbers next to every instrument. The **bid** is what a buyer pays you; the **ask** is what a seller charges you. Halfway between is the **mid price**. **Alex Tutor:** The difference is the **spread**. You pay about half of it going in and half coming out, so a round trip costs one full spread. **Nora:** Two cents here, forty there. Who cares about cents? **Alex Tutor:** Cents mean nothing until you compare them with the price. Turn the spread into a percent of the mid: that's the cost of a round trip on every dollar you trade. **Alex Tutor:** Start with the round trip itself, in dollars, on the calmest instrument we have. > **Exercise:** At midday the Harbor 20 Index Fund shows bid 112.39 and ask 112.41. You buy 100 units at market and sell them straight back at market. How many dollars do you lose, before fees? ![At 20:00 Spark Coin has the smallest spread in cents, 10, but the biggest in percent of the mid, 4.17%, against 0.27% to 1.02% for the others.](https://productovi.com/courses/trading/diagrams/m2-l3-spread-percent.png) $$ \text{spread, \%} = \frac{\text{ask} - \text{bid}}{(\text{ask} + \text{bid}) / 2} \times 100 $$ *The spread as a percent of the mid price* **Alex Tutor:** Here are four Pebble instruments at four times of day. The sizes show how many units wait at the best bid and the best ask. **Dataset (CSV):** [Quotes by time of day](https://productovi.com/datasets/trading/bid-ask-liquidity/m2_quotes_by_hour.csv) Shares and the fund trade on an exchange from 09:30 to 16:00; 20:00 is after hours. Spark Coin trades around the clock. - `instrument`: HRB fund, NWF and BFE shares, SPK coin - `session`: open, midday, close, after-hours or evening - `bid_size`: Units waiting to be bought at the bid - `ask_size`: Units waiting to be sold at the ask **Sofia:** Harbor 20 at midday is 112.39 and 112.41: two cents on a 112-dollar fund. **Alex Tutor:** That's 0.018% of the mid, almost nothing. Now take Spark Coin at 20:00. > **Exercise:** Spark Coin at 20:00 shows bid 2.35 and ask 2.45. What is the spread as a percent of the mid price? Two decimals. ## Deep and thin **Alex Tutor:** That difference is about **liquidity**: how easily you can trade a size without moving the price. A deep market has many orders near the price and a tight spread. A thin one has few orders and a wide spread. **Alex Tutor:** Quick check: how would you recognise a thin market on the screen? > **Exercise:** Which two signs on the quote screen point to a thin market? **Marc:** Look at the times, too. Northwind is 8 cents at the open, 2 at midday and 24 after hours. Same share, same day. **Alex Tutor:** Right after the open, prices are still settling. After hours, most traders have gone home, so the few who stay quote wide. Midday is usually the cheapest time to trade a share. > **Exercise:** In the quotes, when is a round trip in Northwind Foods cheapest? **Nora:** Fine, shares sleep at night. So at 20:00 the coin must be the cheapest, only 10 cents! **Alex Tutor:** Don't trust the cents. A cent means a lot on a 2-dollar coin and little on a 112-dollar fund. Work it out in percent. **Sofia:** So I divide each spread by its own mid. > **Exercise:** Put the four instruments at 20:00 in order from the cheapest spread in percent to the most expensive. ## Walking the book **Marc:** Liquidity matters most on the way out. When I'm wrong, I want to leave quickly at a fair price. In a thin market the exit door is narrow, and everyone runs for it at once. ![By day pebbles pass easily through a wide gate; at night the gate is narrow and pebbles jam in front of it while Marc points at the crush and Nora waits.](https://productovi.com/courses/trading/diagrams/m2-l3-scene.png) **Alex Tutor:** Good point. So before a trade, check two numbers: the spread in percent, and how many units wait at the best prices compared with the size you want. **Nora:** At 20:00 I want 500 Spark Coins. The ask says 2.45, so that's 1,225 dollars, right? **Alex Tutor:** Check ask_size: only 150 coins wait at 2.45. A market order for 500 eats those, then climbs to the next sellers. That's called walking the book. Here is the full order book at 20:00. **Dataset (CSV):** [Spark Coin order book at 20:00](https://productovi.com/datasets/trading/bid-ask-liquidity/m2_spk_book.csv) Asks are sellers waiting, bids are buyers waiting. > **Exercise:** Nora sends a market buy for 500 coins at 20:00. Using the asks from the cheapest up, how many dollars does she pay in total? **Sofia:** And if she changes her mind and sells straight back? **Alex Tutor:** Work it out first: walk the bids down from the top and add up what she gets. > **Exercise:** Right after buying, Nora sells all 500 Spark Coins back at market at 20:00. Taking the bids from the highest down, how many dollars does she receive? **Alex Tutor:** Then she walks the bids down: 120 at 2.35, 200 at 2.33, 180 at 2.30. She gets 1,162.00 back and loses 74.50, 6.0%, without the price moving at all. ![A market buy of 500 coins takes 150 at 2.45, 200 at 2.47 and 150 at 2.50 for 1,236.50; selling them straight back returns 1,162.00, a 74.50 loss.](https://productovi.com/courses/trading/diagrams/m2-l3-walk-book.png) **Nora:** 74.50 just for clicking twice? > **Exercise:** The price you see on the screen is the price a market order for any size will get. **Marc:** That's why, in a thin market, I use a limit order and a smaller size, or I wait for busy hours. **Nora:** Coins never close, though. Night is just the cheap time to buy, isn't it? **Alex Tutor:** Open doesn't mean liquid. At 20:00 Spark Coin's spread is five times its midday spread. Thin hours are when coins see the wildest jumps and the fake pumps. > **Exercise:** At 20:00 Nora wants to buy Bluefin Energy at market "before tomorrow's open". Using the quotes, explain in 2–3 sentences what it would cost her and what she could do instead. > **Key ideas** > > - You buy at the **ask** and sell at the **bid**; a round trip costs about one full **spread**. > - Compare spreads in **percent of the mid**: 10 cents on a 2.40 coin (4.17%) costs far more than 40 cents on a 39-dollar share (1.02%). > - **Liquidity** is how easily a size trades without moving the price. Thin markets: wide spreads, small sizes. > - The open, after hours and quiet nights are thin times. Midday is usually cheapest for shares. > - A big market order **walks the book**: 500 coins averaged 2.473, and selling straight back lost 74.50. > **Educational, not advice** > > This course explains how trading works; it never tells you what to buy or sell. Most people who trade lose money, and you can lose all of it. Coins and thin markets can jump wildly. For taxes and rules, ask a licensed professional where you live. - Previous lesson: [Order types: market, limit, stop](https://productovi.com/courses/trading/order-types.md) - Next lesson: [Case: place the right order](https://productovi.com/courses/trading/choose-the-right-order.md) --- Productovi Learning. Free, no sign-up needed to read.