Bid Ask Spread = Ask price – Bid Price
Bid ask spread formula is utilized to understand the difference between the asking price and bid price any specific investment. Moreover, the bid ask spread is primarily used for investments which sell on exchange however, it can be used for other investments too.
In other words one can also say that bid-ask spread is the amount difference with which the ask price exceeds the basic bid price for an asset in the market. Or the price difference between the buyer offer and seller demand for any specific item can also be called as bid-ask price.
How bid ask spread is useful for investors or analysts
Typically, bid ask spread is used to calculate the liquidity of a particular investment as we said earlier. If the trade volume is higher than bid-ask spread will be typically lower as compared with low trade volume. Bid ask spread is used to evaluate the possible price difference in both buyer demand and seller offer. By comparing the difference one can also estimate the potential of negotiations with seller. On the other side the assets may take longer to sale if price is too high or maybe there’s low demand for the product.
Bid-ask price spread use is very common for stocks, futures, currency exchanges and swaps because they are more liquid and can attract much buyer when available for sale as compared to other assets. In some scenarios, the bid-ask spread difference indicates towards the cost of buying a particular investment. More particularly when an intermediary (broker or agent) involves in the buying process and charge a fee. For instance, if a specialist is involved in the process of buying and he is selling on you behalf and also buy the same security. In that case, the spread will be consider as a profit for your broker, and it will be cost for 1st owner of security theoretically.
Bid ask spread example
Let’s suppose, that the bid price for a share is $37 while the seller is asking a price of $42 (ask price). Now if we calculate the bid-ask spread for the above case it will be $5. We can also report the difference in percentage form where it will use lower value from both selling or ask price. If we look at the above example then the lower value is $37 and spread is $5. We can calculate percentage as;
Bid ask spread = (5 ÷ 37) × 100
Bid ask spread = 13.51%
The spread will go on the lower side if the buyer increase the bid or the seller decrease the price to make it close to buyer offer.