Investors often focus on asset selection and expected returns, while less obvious costs receive little attention. Understanding these costs helps investors assess opportunities more realistically and avoid surprises.

The Price on Your Screen May Not Be Your Trade Price

You choose a stock, check its price and submit an order. However, the trade goes through at a different price than you expected. The displayed figure may represent the price of the last trade, while your purchase depends on the offers currently available. To understand the conditions under which you can trade, you therefore need to know two terms: bid and ask.

Bid and Ask: Two Sides of a Trade

The bid is the highest price a buyer is currently willing to pay, while the ask is the lowest price a seller is willing to accept. When buying immediately, an investor generally accepts the ask; when selling, the bid. If the bid is €99.80 and the ask is €100.20, an investor can buy a share for €100.20 but sell it for €99.80. These prices change continuously and apply only to the number of shares available at each price.

The Spread: A Cost Built into the Price

The difference between the ask and the bid is called the spread, which in our example is €0.40 per share. An immediate purchase followed by a sale at unchanged prices would therefore result in a €0.40 loss before any additional fees. This cost generally does not appear as a separate item on a statement because it is built directly into the execution prices. Commission-free trading is therefore not necessarily cost-free.

Why the Spread Changes

The spread is closely linked to liquidity, meaning the ability to trade without significantly affecting the price. For actively traded securities, competition among buyers and sellers generally brings their quoted prices closer together. Less liquid instruments tend to have wider spreads. However, spreads can also widen around major news or sharp price movements, when market participants adjust their prices or withdraw orders.

When Cents Turn into Tens of Euros

For 100 shares, the same immediate purchase and sale would result in a €40 difference, provided prices remained unchanged and sufficient volume was available. It is also useful to measure the spread as a percentage: €0.40 relative to the €100 midpoint between the bid and ask equals 0.4%. Repeated trading causes these costs to accumulate, which matters particularly when trying to capture small price movements. Long-term investors who make fewer transactions encounter them less often (if you are interested in how even small costs can affect long-term investment results, you can learn more in our previous article).

Spread, Commission and Slippage Are Not the Same

In addition to the spread, investors may incur a broker’s commission and experience slippage—the difference between the expected and actual execution price. Slippage can occur when the market moves while an order is being processed, or when there are insufficient shares at the best price and the rest of the order is filled at less favourable prices. However, it can also work in the investor’s favour. When assessing costs, these effects should be distinguished so that they are neither overlooked nor counted twice.

How to Gain Control over the Execution Price

A market order prioritises prompt execution but does not guarantee a specific price. A limit order sets a maximum purchase price or a minimum selling price, but it may be filled only partially or not at all. It does not automatically eliminate the spread. Before trading, it therefore helps to check quoted prices and available volume, while also considering trading hours: outside regular market hours, lower liquidity can mean less favourable conditions (you can read more about the risks of trading before the market opens and after it closes in our previous article).

Trading Conditions Matter Too

A quick check of prices, costs and order type can be a useful part of an investment routine. The aim is not to seek the smallest spread at any cost, but to assess its significance in relation to trade size, strategy and investment horizon. Careful execution does not guarantee a profit, but it helps investors avoid costs they might otherwise overlook.

For more investment trends and useful tips, explore our previous articles on AxilAcedmy.