The Trading Cost Everyone Sees vs. The One That Actually Hurts
When retail brokers advertised commission-free trading, millions of people concluded that trading had become free. This is understandable. It is also wrong.
Commissions were never the largest trading cost for most active traders. The largest cost, before commissions, before platform fees, before taxes, is the bid-ask spread. And the spread is completely invisible on your trade confirmation.
You don’t see it. You don’t pay it as a line item. But every time you buy a stock and sell it immediately, you lose money to the spread. Every time you enter a position, you start underwater by exactly the spread amount. Over hundreds of trades, this invisible cost is often larger than everything else combined.
Understanding spreads is not an advanced topic. It’s a foundational one. And most beginners don’t know it exists.
What a Bid-Ask Spread Is
Every stock in the market has two prices simultaneously: the bid and the ask.
The bid is the highest price a buyer is currently willing to pay. The ask (or offer) is the lowest price a seller is currently willing to accept.
The spread is the difference between these two prices.
You buy at the ask. You sell at the bid. The market maker, the intermediary facilitating the trade, profits from this spread as compensation for providing liquidity.
A simple example: a stock is quoted at $10.00 bid / $10.05 ask. If you buy 1,000 shares, you pay $10,050 (at the ask). If you immediately sell those same 1,000 shares, you receive $10,000 (at the bid). You’ve lost $50 without the stock moving a penny. That $50 went to the market maker as the spread cost.
On a $10,050 position, that’s a 0.5% cost just to enter and exit. A $0.004/share commission on 1,000 shares is $4.00. The spread cost is 12.5x larger.
Why Spreads Vary and Why It Matters
Not all spreads are equal. They vary based on a stock’s liquidity, how actively it’s traded.
Apple (AAPL), trades hundreds of millions of shares per day. Bid-ask spread: typically $0.01. On a $200 stock, that’s 0.005%. Effectively negligible.
A mid-cap stock, trades a few million shares per day. Spread: $0.05–$0.15. Starting to matter.
A low-float small-cap runner, trades on momentum. Spread: $0.15–$0.50 or wider. On a $5 stock, a $0.25 spread is 5% round-trip. That’s enormous.
This is why experienced day traders are careful about which stocks they trade. A high-momentum low-float stock looks exciting on the chart, it’s moving fast. But the wide spread means every entry and exit is expensive. The apparent opportunity may be largely consumed by spread costs before you’ve made a single correct decision.
Commission-Free Doesn’t Mean Cost-Free
The brokers that offer $0 commissions, Robinhood, Webull, and others, make money through payment for order flow (PFOF). They route your orders to market makers who fill them at prices that are slightly worse than what you would have received with direct routing. The difference, the PFOF capture, is a form of spread cost embedded invisibly in your fill.
You don’t pay a commission. But your fills are slightly worse. For small, infrequent trades, this is negligible. For active traders executing dozens of trades per day, it accumulates.
This is one reason direct-access brokers like Cobra Trading and Interactive Brokers charge visible commissions. Their orders go directly to the exchange, where you have the best chance of filling at or near the mid-price. The visible commission is often smaller than the invisible PFOF cost at zero-commission brokers.
How to Minimize Spread Costs
Trade liquid stocks. The simplest and most effective approach. Stocks with narrow spreads are cheaper to trade even if their commission cost is identical. For most day trading strategies, prioritize tickers with $0.01–$0.05 spreads.
Use limit orders. A limit order placed at the mid-price (halfway between bid and ask) sometimes fills at a better price than the ask, reducing your spread cost. For liquid stocks, this works frequently. See our article on Why Limit Orders Beat Market Orders.
Check the spread before sizing. If the spread on a setup is wide relative to your intended profit target, the math may not work. A $0.20 profit target on a stock with a $0.15 spread requires a near-perfect entry and exit just to break even.
Trade during peak liquidity hours. Spreads are typically tightest during the most active trading periods, roughly 9:30–11:30 AM and 2:30–4:00 PM EST. Pre-market and after-hours spreads are significantly wider.
The Invisible Cost That Determines Profitability
Strategies that look profitable on paper often fail in live trading because the spread cost wasn’t accounted for in backtesting. A system that captures $0.10 per share with $0.01 commissions and $0.02 spreads nets $0.07. The same system on a stock with a $0.08 spread nets $0.01, a 93% reduction in profit from a cost that never appeared on any statement.
Track your spread costs. Understand the liquidity of every stock you trade. Prioritize setups where the spread is small relative to your profit target.
The brokers who eliminated commissions did not eliminate trading costs. They just made the costs harder to see.
All investing involves risk. This article is for educational purposes only and does not constitute financial advice.