How to calculate a bid-ask spread

Written by tim plaehn Google
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How to calculate a bid-ask spread
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When investors look up security prices in their trading accounts, there are two prices listed--the bid and ask prices. Bid prices are the current prices at which market participants have indicated they will buy securities. The ask prices are what market participants are willing to sell the securities. The ask prices will be higher than the bid prices and the differences between the prices are the bid-ask spreads.

Skill level:
Easy

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Instructions

  1. 1

    Look up the desired security pricing using your trading account website or the website of an online broker that offers quotes without requiring an active account. For example, the E-Trade website will allow quote lookup from the home page without requiring an account or sign in. Stock prices can be found by entering the stock symbol. Option prices can be found by selecting option chains after looking up the underlying stock.

  2. 2

    Write down the bid and ask price of the selected security. For example, on a day in September 2010, Aegean Marine Petroleum Network--stock symbol ANW--was quoted at a bid price of £11.10 and an ask price of £11.20.

  3. 3

    Subtract the bid price from the ask price for the bid-ask spread. In the ANW example, the spread is 18 cents.

  4. 4

    Divide the bid-ask spread amount by the ask price to convert the spread to a percentage. For the ANW example, dividing 18 cents by £11.20 results in a spread of 1.04 per cent.

Tips and warnings

  • The bid-ask spread can range from a penny on actively traded stocks to 25 per cent or more on options with low volume trading. If you buy a security at the ask price, it must move up by more than the bid-ask spread plus any commissions paid before the trade is in a profit position. Bid-ask spreads will widen significantly when the market is closed.

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