Bid Ask Spread
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Bid Ask Spread
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Community Submission - Author: Vitor Mesk
The concept is known as the bid-ask spread because it is the gap between the lowest asking price (sell order) and the highest bid price (buy order).
Basically, the bid-ask spread may be formed in two different ways. First, it can be created by a broker (or trading intermediary) as a way to monetize for their service. Second, it can be created just by the differences between the limit orders placed by traders on an open market.
In traditional markets, the bid-ask spread is a common way of monetizing from trading activities. For example, many brokers and trading platforms offer commission-free services that only monetize by making use of the bid-ask spread. This is possible because they are the ones that provide liquidity to the market, meaning that sellers and buyers need to accept the price defined by the broker. Otherwise, they cannot participate in that market. In other words, they set the difference between selling and buying prices and make profits from it, essentially buying at a lower price from sellers and selling at a higher price to buyers.
With cryptocurrencies , most trading activities occur on cryptocurrency exchanges , where buying and selling orders are directly placed by the users (traders) into the order book. In this case, the exchange doesn’t monetize from the spread, but only from the trading fees.
Usually, high volume markets have a lower spread because of their higher liquidity (more competition among buyers and sellers). On the other hand, markets that are not liquid enough and present low trading volume tend to have a more significant spread.
The lowest price a seller is willing to accept on their sell order when trading an asset on an exchange.
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Bid-Ask Spread in Excel (with excel template)
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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 –
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 –
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 –
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.
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.
You can use the following Bid-Ask Spread Calculator
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 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 article has been a guide to the bid-ask spread formula. Here we discuss the Bid-Ask Spread calculator along with examples and excel templates. You may also look at the following articles to enhance your investing skills.
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