Bid Ask Spread Meaning with Example
Bid Ask Spread Meaning – It is the difference between bid price and the ask price
Bid price is the price at which the buyer is willing to buy a stock. On the other hand, ask price is the price at which the seller is willing to sell the stock. So when these two prices matches with each other, it results in a trade. In other words when the buyer and seller agrees on a same price, it is known as bid ask spread.
In the market, prices are determined by the demand and supply. It is demand and supply forces only which determines the difference between the bid price and the ask price, that is the bid ask spread. It is self understandable that the higher the difference between the two prices, higher the spread.
It is expressed both in absolute as well as percentage terms. It is mostly seen that, if the market is highly liquid the spread is small. On the contrary, if the market is less liquid, the spread is greater.
Bid Ask Spread Formula and Example
In case of Absolute terms, Spread = Ask Price – Bid Price
In case of percentage, Spread = (Ask Price – Bid Price) – Ask Price × 100
Note – Do not confuse with ask price or offer price as it is same. Similarly bid price and buy price are also same.
In order to understand the bid ask spread meaning more clearly, let’s discuss an example.
Suppose the bid price of Reliance Infrastructure is Rs. 100 and the ask price is Rs. 102, what would be the bid-ask spread?
In absolute terms, spread = 102 – 100
Importance of Bid Ask Spread
The most important aspect of Bid – Ask Spread is that purchaser pay the ask price and seller receives the bid price. This aspect is very important for the securities dealers as they purchase the stocks at bid price and sells them at the ask price. So the size of the spread is directly proportional to the size of the profit that the dealers earn.