The bid-ask spread is the difference between the highest price a buyer is willing to pay for an asset (the bid) and the lowest price a seller is willing to accept (the ask). This spread is a key indicator of market liquidity; a smaller spread often suggests a more liquid market, while a larger spread may indicate less liquidity or higher volatility. Traders and investors need to understand the bid-ask spread because it affects the cost of entering and exiting positions. For example, if you buy an asset at the ask price and sell it at the bid price, the spread represents an immediate loss. Thus, the bid-ask spread is crucial for making informed trading decisions.