The bid-ask spread refers to the difference between the price at which a buyer is willing to purchase an asset (the bid) and the price at which a seller is willing to sell it (the ask). This spread is a key concept in trading and reflects market liquidity.

A narrower spread typically indicates a more liquid market, where buyers and sellers can easily transact at closer prices. Conversely, a wider spread may suggest lower liquidity, making it more challenging to execute trades at favorable prices.

In practice, when trading, a buyer will look at the bid price to determine how much they are willing to pay, while sellers will focus on the ask price to see how much they can receive. The bid-ask spread can be influenced by various factors, including trading volume, market sentiment, and volatility.

Understanding the bid-ask spread helps traders assess costs associated with entering and exiting positions, enabling more informed decisions in their trading strategy.