Bid-Ask Spread Formula
The ask price is lowest price of the stock at which the prospective seller of the stock is willing for selling the security he is holding whereas the bid price is the highest price at which the prospective buyer is willing to pay for purchasing the security and the differences between the ask price and the bid prices is known as the bid-ask spread. And its formula you can use to calculate the spread –
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For eg:
Source: Bid Ask Spread Formula (wallstreetmojo.com)
Example
Let’s take a practical example of spread to see how it works.
Tim decides to buy a few stocks with the excess savings he has. His friend Brown is a long-time investor. Brown asks Tim to find out the spread of the company M before he invests in it. Brown says that understanding the bid-ask spread will help Tim in future investments. Brown has provided the following details –
- The bid price (an assumed one) of a stock of Company M – $100;
- The asking price (also an assumed one) of a stock of Company M – $102;
Since Tim is a new investor, he doesn’t understand what the spread is. So he finds out the formula and applies it. And in one go, he is able to find out the spread of the stock of Company M. Here’s his calculation –
- Spread = Ask price of a stock – Bid price of the same stock
- = $102 – $100 = $2.
- As per Tim, the spread of a stock of Company M is $2.
Explanation
If you want to make your mark as an investor, you need to know the basics of stock trading. Spread is a concept that every investor needs to understand.
When a stock is sold, it has two parties – buyers and sellers. The buyers tell the sellers that they are ready to pay the price for the stock. We call it a ‘bid price.’ The sellers also tell the buyers that they can sell the stock at a price. The price sellers ask is always a little higher than the price buyers are ready to pay. The price sellers ask for a stock is called an ‘ask price.’
In the bid-ask formula, we find out the difference between the price the sellers ask and the price the buyer’s bid.
source: NSE India
We can see from the bid-ask example of Reliance Industries. For a buy quantity of 47, the bid price is 925.25, whereas the asking price is 925.30. Bid-Ask = 925.30 – 925.25 = 0.05.
As an investor, you may ask – why the sellers always ask for the higher price of a stock. It is because they keep a little profit for themselves. But that’s not the only thing that’s included in the ‘ask price.’
Along with the commission of the broker, the spread also includes a number of fees.
Bid-Ask Spread Calculator
You can use the following Bid-Ask Spread Calculator
| Ask price of a stock | |
| Bid price of the same stock | |
| Bid Ask Spread Formula | |
| Bid Ask Spread Formula = | Ask price of a stock – Bid price of the same stock |
| 0 – 0 = | 0 |
Bid-Ask Spread in Excel (with excel template)
Let us now do the same example above in Excel.
It is very simple. You need to provide the two inputs of the Ask price of a stock and Bid price of the same stockBid Price Of The Same StockBid Price is the highest amount that a buyer quotes against the “ask price” (quoted by a seller) to buy particular security, stock, or any financial instrument. read more.
You can easily find out the spread of the stock of Company M in the template provided.
You can download this Bid-Ask Spread template here – Bid-Ask Spread Excel Template.
Bid-Ask Spread Video
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