What Is a Bid-Ask Spread? Why the Buying and Selling Prices Differ on the NGX
The bid is the highest price a buyer is offering; the ask is the lowest price a seller will accept. Here is what the gap between them means, why it widens on thinly traded NGX shares and how it affects market and limit orders.
A bid-ask spread is the difference between the bid, which is the highest price any buyer is currently willing to pay for a share, and the ask or offer, which is the lowest price any seller is currently willing to accept. On the Nigerian Exchange (NGX) both figures come from the order book, where every unfilled buy and sell order for a share is queued by price. The spread is the gap between the front of the buy queue and the front of the sell queue, and it is the cost, in price terms, of trading immediately rather than waiting.
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Important disclaimer. This article is for educational purposes only. It is not financial advice and is not a recommendation to buy any specific share or investment product. Always do your own research and consider seeking independent financial advice before making any investment decision.
Bid, Ask and Last Price
A share quote usually shows three prices. The last price is the price at which the most recent trade was matched. The bid is what buyers are offering now. The ask is what sellers are asking now. The last price is history; the bid and ask are the live market. If a share last traded at a certain price an hour ago, and since then the buyers have gone quiet, the current bid may be well below that last price, and a seller who wants out now will only get what the bid offers.
- Bid: the price at which you can sell immediately, for as many shares as are bid at that price.
- Ask: the price at which you can buy immediately, for as many shares as are offered at that price.
- Spread: ask minus bid. It is often also shown as a percentage of the mid-price so that shares with different price levels can be compared.
- Depth: the quantity available at the bid and the ask. A narrow spread with only a few hundred shares behind it is not the same as a narrow spread with millions.
How the NGX Order Book Produces the Spread
NGX equities trade on an automated system with a central order book. Trading licence holders enter their clients' orders, and the system ranks them by price first and then by time: the highest buy orders and the lowest sell orders sit at the front of their queues. A trade happens when a buy order and a sell order meet at the same price. If the highest bid is below the lowest ask, nothing trades and the gap between them is the spread. The NGX also has market makers for some securities, firms that undertake to keep two-sided quotes in the book, which is one of the reasons some shares have a continuously quoted bid and ask while others do not.
Why the Spread Widens on Thinly Traded Shares
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The spread is set by the people who happen to have orders in the book. In a share that trades in large volumes every session, there are many buyers and sellers competing, each willing to improve their price slightly to get to the front of the queue, so the bid and the ask are pushed close together. In a share that trades rarely, the book may contain a handful of orders placed by people with very different ideas of the price, or a seller and no buyer at all. Nothing forces those orders closer together, so the spread stays wide, and it can stay wide for days.
- Few participants: with only a few orders in the book, there is little competition on price.
- Small free float: when most of a company's shares are held by a parent or founders, the number available to trade is small and the book is thin.
- Uncertainty: after news, or when a company has not reported for a while, buyers and sellers disagree more about what the share is worth, and each side keeps its order away from the other's.
- Price limits: the NGX daily limit of plus or minus 10% around the previous close caps how far an order can be placed from the last price, which bounds the spread but does not narrow it.
- Time of day: the book is often thinner at the open and near the close of the 9:00 to 16:00 WAT session, and on days when overall market volume is low.
On a thinly traded share, the last price can be misleading. It may reflect a small trade from days ago, while the live bid and ask are far apart and far from it. The live quote, not the last price, is what your order will meet.
Spread, Market Orders and Limit Orders
The spread is where the choice between a market order and a limit order becomes concrete. A market order says "fill me now at whatever is available": a market buy is matched against the ask, a market sell against the bid, and if the quantity at that price is not enough the order walks further into the book, filling at worse prices. On a share with a wide spread, a market order to buy pays the full ask and a market order to sell receives the full bid, and the two together can be a large fraction of the share's value. A limit order says "fill me only at this price or better": it sits in the book and waits. It may narrow the spread itself, by becoming the new highest bid or lowest ask, and it may never fill. A separate article on this site explains both order types in detail.
Many brokers show the current bid and ask, and the quantities behind them, before you confirm an order. Where the spread is wide, the order type decides whether you cross the spread now or wait on your side of it.
What the Spread Does Not Tell You
The spread is a measure of how easy a share is to trade right now, not of the company behind it. A wide spread does not mean a business is in trouble and a narrow one does not mean it is sound; it means, respectively, that few people are trading the share and that many are. The spread also changes through the day and from day to day. It is one of several figures, alongside daily volume and free float, that describe a share's liquidity, and it is separate from the broker commission and statutory charges on your contract note.
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See How It WorksBid-Ask Spreads on the NGX: FAQs
Where can I see the bid and ask for a share?
Your stockbroker's trading platform normally shows the current bid and ask and often the depth behind them. The NGX publishes end-of-day price lists on its website, and data vendors distribute the live order book to brokers and platforms.
Why is there no bid or no ask for a share?
Because nobody has an order on that side of the book. It happens on shares that rarely trade. A seller in a share with no bid has no one to sell to until a buyer enters an order; a limit order placed on the empty side becomes the only quote.
Is the spread a fee my broker charges?
No. The spread is the gap between other investors' orders. Your broker's commission and the statutory charges are separate and appear on your contract note. Both are costs of trading, but only the commission goes to the broker.
Does a market maker remove the spread?
It narrows and stabilises it. A market maker quotes both a bid and an ask and earns the difference, so its presence means there is usually a two-sided quote. The spread it quotes still reflects how risky the share is to hold and how much it trades.
Important disclaimer. This article is for general information and educational purposes only. It does not constitute financial advice, investment advice, or any recommendation to buy, sell, or hold any security. The value of investments can fall as well as rise. You should seek independent regulated financial advice before making any investment decision. Shares Saver does not provide financial advice.
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