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What is the Bid and Ask Spread and how to calculate it

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In-between the security price (bid) and offer price (ask) there is the bid-ask price which is actually the highest price (bid) for a buyer to pay and the lowest price for a seller, to accept. When these two, come to an agreement then the transaction is accomplished.The bid-ask spread is significant to investors because it is a concealed cost incurred when trading stocks, bonds, commodities, foreign currency and so on.

Supply and demand for security determine spreads’ liquidity. When there is a good balance between supply and demand, the most fluid securities tend to not to have strong spreads and when the opposite occurs the consequence is the spread to grow wider.



Bid-ask spreads stand for a cost that beginners is not likely to realize. The cost is bigger for active traders and not so much for those who frequently trade.

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Spreads’ level of extent decrease according to of the supply-demand disparity. Sellers are willing to sell but buyers expect for lower prices. This results to a wider spread. The reason is because the risk of loss is higher throughout unstable times.

For example, a stock is trading at $9.90 / $10. The bid price is $9.90 and the offer price is $10, which means that the bid-ask spread in this case is 5 cents. A buyer who takes the stock at $5 and sells for $9.90 (bid price) would incur a loss of 50%. The purchase and instant sale of 50 shares would involve a $5 loss, as if 10,000 shares would involve a loss of $500. In both cases the loss incurred percentage is equal.
 

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