How Is Bid-offer Spread Calculated?

How Is Bid-offer Spread Calculated?

1 Answer

  1. Firstly, to understand the formula, let’s revise the concept, the highest price at which a market-maker will buy the stock is known as the bid, while the lowest price among those willing to sell is called the ask. The interval between those two prices is the bid-ask spread.
    Let’s assume you bought 100 shares from a company for 10 dollars and as soon as you bought them the price reduces to 9 dollars then the one dollar you spent extra is your bid-offer spread.
    If you wish to calculate the bid-ask spread percentage, simply take the bid-ask spread and divide it by the sale price. Now walking through an example, If you buy 1000 shares of a stock with a spread of a penny, then the added cost from the spread will be 1000 x $0.01 x 1/2, or $0.50. For a larger transaction of 10,000 shares on a stock with a bid-ask spread of a dime, the cost is much higher: 10,000 x $0.10 x 1/2, or $50.

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