Bid Ask Spread

Bid-ask spread (also called bid-offer spread) is the excess of the price at which a financial market participant is willing to sell a financial instrument (the ask or the offer) over the price at which he is willing to buy it (the bid).

Bid-ask spread is the mechanism by which dealers in the quote driven markets are compensated.

Market bid-ask spread equals the excess of the best ask (the lowest ask) over the best bid (the highest bid. Though every participant in a quote-driven market has his own bid and ask prices, the market bid-ask spread is different from individual bid-ask spreads.

Bid-ask spread depends on market liquidity and volatility of the relevant financial instrument (i.e. stock, currency, bonds, etc.)


Bid-Ask Spread = Ask Price − Bid Price

Market Bid-Ask Spread = Best Ask Price − Best Bid Price

Ask/offer price (or ask) is the price at which the dealer sells and bid price (or bid) is the price at which he purchases it.


Example 1: Stock Bid-Ask Spread

Low-cap stocks are normally traded on quote-driven markets. Best bid/best ask (market bid ask) for Tesla Motors, Inc. (TSLA) on NASDAQ as on 18 July 2012 is $118.28/$118.49. This gives us a bid ask spread of $0.28 [= $118.49 − $118.28].

This means if you have 100 shares of Tesla, you can sell them for $11,828 [= $118.28 × 100], however, if you want to purchase 100 more shares of Tesla, you will have to pay $11,849 [= $118.49 × 100].

Example 2: Currency Bid-Ask Spread

Forexica sells Euro at 1.3093€/$ and purchases it at 1.3089€/$. Find the bid-ask spread.

1.3093 is the sale price, so it is the ask. 1.3089 is the purchase price, and hence the bid. This gives us a bid-ask spread of 0.0004 [= 1.3093 − 1.3089] or 4 pips. In foreign currency markets this 4th decimal is called one pip.

Example 3: US Treasuries Bid-Ask Spread

US treasuries bid-ask quotes are expressed in terms of multiples of 1/32s.

Bid-ask quote for a $1,000 US bond that carries 6% coupon rate and matures in 15 years is 103.16 − 28. It means the dealer is willing to buy the bond for $1035 [= (103 + 16/32)/100 × $1,000]. He is willing to sell the same bond for $1,037.5 [= (103 + 24/32)/100 × $1,000].

by Obaidullah Jan, ACA, CFA and last modified on is a free educational website; of students, by students, and for students. You are welcome to learn a range of topics from accounting, economics, finance and more. We hope you like the work that has been done, and if you have any suggestions, your feedback is highly valuable. Let's connect!

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