In trading, what does a higher bid-ask spread typically indicate?

A higher bid-ask spread typically indicates less liquidity and potentially more volatility in the market. When the spread is wide, it suggests that there is a significant difference between what buyers are willing to pay (the bid) and what sellers are asking for (the ask). This situation can arise in markets where there are fewer participants or lower trading volumes, making it harder to execute trades at desired prices.

In less liquid markets, the limited number of buyers and sellers can lead to greater price fluctuations, as large trades may have a more pronounced effect on prices. A wider spread can also reflect uncertainty or risk associated with the asset, which may in turn contribute to increased volatility. Thus, a higher bid-ask spread is often seen as an indicator of market conditions that are not as favorable for trading, where participants may need to pay more to enter or exit positions effectively.