How brokers' spread costs work?

External question — Quantitative Finance Stack Exchange Author: Stack Original post: https://quant.stackexchange.com/questions/53380 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. I am trying to understand how to size and compare brokers' costs. As per my understanding, they charge customers on either or both spreads and commissions. The latters are straightforward: for each contract a percentage/a fixed amount has to be paid to the broker (two times per round trade, i.e. when entering and when exiting the position): - buying and selling 1 share at 100\$ with 1% commission would result in 2\$ total commissions - buying and selling 1 ES contract (value 50\$) with fixed commission of 3\$ would result in 6$ total commissions Instead, I cannot get how spread costs work. Can please someone explain the rationale, possibly with numeric examples as above? P.S.: please also advise whether something above is not correct

External answer — Quantitative Finance Stack Exchange Author: Andreas Original post: https://quant.stackexchange.com/a/53382 License: CC BY-SA 4.0 — https://creativecommons.org/licenses/by-sa/4.0/ Adaptation: HTML converted to plain text; contact email addresses removed. The spread, or Bid-Ask spread indicates the difference between the prices which market participants are willing to sell at ( Ask ) and willing to buy at ( Bid ). If you are selling without any specific instruction (i.e. place a market order at the best possible price), you are going to get the bid price, if you are buying, you are going to do so at the ask price. Assume the following about a stock: Bid 99.50 - 100.50 Ask In case you want to buy 1 share, you're going to have to pay 100.50 ( Ask ). If after a moment you'd change your mind, you'd only get 99.50 ( Bid ). The spread, in this case 1.00 goes to the market maker. Similarly, if you intend to buy and someone else intends to sell, you typically pay the Ask and the seller gets the Bid . If however, you're placing a limit buy order (i.e. a limit on how much you're at maximum willing to pay) at let's say 99.80, and the seller places a regular market order at best price, the trade is executed at 99.80, which saves you 0.7.