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Bid-Ask Spread Formula
Bid ask spread is an important consideration in the stock trading. Here’s the bid ask spread formula you can use to calculate the spread –
Explanation of Bid Ask Spread Formula
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 a 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 bid-ask formula, we find out the difference between the price the sellers ask and the price the buyers bid for.
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 ask 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 Formula Example
Let’s take a practical example of spread to see how it works.
Tim decides to buy 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 into it. Brown says that understanding 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 ask 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.
Bid-Ask Spread Calculator
You can use the following Bid-Ask Spread Calculator
|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.
This is very simple. You need to provide the two inputs of Ask price of a stock and Bid price of the same stock.
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
This has been a guide to bid-ask spread formula, calculator of the bid-ask spread, along with examples and excel templates. You may also look at the following articles to enhance your investing skills.
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