The bid-offer spread is the gap between the price at which an investment can be sold (the bid) and the higher price at which it can be bought (the offer). The difference is an immediate cost borne by the investor.
In one line: The bid-offer spread is the difference between the lower selling price and the higher buying price of an investment.
How the bid-offer spread works
The bid-offer spread arises in markets for shares, ETFs and some funds, and platforms operating under FCA rules must show the prices clearly. The spread reflects market-making and liquidity, and is wider for less traded assets.
For example, a share quoted at 99p bid and 101p offer has a 2p spread. Buying at 101p and immediately selling at 99p loses 2p per share before any dealing fee.
Frequent trading magnifies the impact of spreads, while modern OEICs avoid them by pricing at a single point.
Bid-offer spread vs the platform fee
The bid-offer spread is a market cost built into the buy and sell prices each time a holding is traded. A platform fee is a separate ongoing administration charge for holding the investment.
A wide spread hurts active traders most, whereas the platform fee applies regardless of how often trades occur.
Primary source: FCA: Investing basics