What is the Bid-Ask Spread?
The Bid-Ask Spread represents the difference between the quoted ask price and the quoted bid price of a security listed on an exchange.
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How to Calculate Bid-Ask Spread
The bid is indicative of the demand within the market, whereas the ask portrays the amount of supply.
The bid-ask spread equals the lowest asking price set by a seller minus the highest bid price offered by an interested buyer.
Electronic exchanges such as the NYSE or Nasdaq are responsible for matching bid and sale orders in real-time, i.e. facilitating transactions between the two parties, buyers and sellers.
- Bids ➝ Interest in Buying
- Ask ➝ Interest in Selling
Each purchase and sell order comes with a stated price and the number of applicable securities.
The orders are automatically arranged in the order book, with the highest bid ranked at the top to meet the lowest sale offer.
- Bid Prices ➝ Ranked from Highest to Lowest
- Ask Prices ➝ Ranked from Lowest to Highest
If a transaction is completed, one side must’ve accepted the opposite side’s offer — so either the buyer accepted the asking price or the seller accepted the bid price.
Bid-Ask Spread Formula
The bid-ask spread calculates the “excess” of the ask price over the bid price by subtracting the two.
The bid price is always lower than the ask price, which should be intuitive since no seller would decline an offer price of greater value than their own requested price.
Moreover, the bid-ask spread is typically expressed as a percentage, where the spread is compared relative to the asking price.
Bid-Ask Spread Percentage Formula
On the other hand, the formula to calculate the bid-ask spread percentage is the difference between the ask price and bid price, divided by the ask price.
Since the bid-ask spread percentage is standardized, the metric is more practical for purposes related to comparability.