How to Calculate the Bid-Ask Spread - Bid-ask spread is the difference between the bid and the ask for security or offer price. It represents the difference between the highest price that a buyer is willing to pay (bid) for the safety and the lowest price that a seller is willing to accept for it. A transaction occurs either when the buyer accepts the seller asking price or take the offer price.
In simple terms, the trend of increasing prices occurs when a buyer exceed the seller, a buyer offered a higher share. Instead, the trend is lower in price when the seller exceeds the number of buyers, because the supply-demand imbalance will force the seller to lower the price of their bid. Bid-ask spread is an important consideration for most investors when trading securities, because of the hidden costs that occurs when the trading of financial instruments - stocks, bonds, commodities, futures, options or foreign currency.
In simple terms, the trend of increasing prices occurs when a buyer exceed the seller, a buyer offered a higher share. Instead, the trend is lower in price when the seller exceeds the number of buyers, because the supply-demand imbalance will force the seller to lower the price of their bid. Bid-ask spread is an important consideration for most investors when trading securities, because of the hidden costs that occurs when the trading of financial instruments - stocks, bonds, commodities, futures, options or foreign currency.
Deployment Considerations
The following points should be remembered with regard to bid - ask spread:
The following points should be remembered with regard to bid - ask spread:
- Spread is determined by liquidity, as well as the supply and demand for a particular security. Most liquid securities traded or tend to have a narrow spread, provided that no major imbalance between supply and demand. If there is a significant imbalance and lower liquidity, the bid-ask spread will widen substantially.
- Spreads on U.S. stocks has narrowed since the advent of "decimalization" in 2001. Prior to that date, the majority of U.S. stocks quoted in fractions of 1/16th of a dollar, from 6.25 cents. Most of the stock is now trading at the bid-ask spread far below that level.
- Bid-ask spreads are costs that are not always obvious to the novice investor. While the cost may be relatively insignificant spreads for investors who do not trade often, they can represent a substantial cost for active traders who make a lot of trades daily.
- Spreads widened during steep market decline due to supply-demand imbalance as the seller "hit bid" and shoppers away in anticipation of lower prices. As a result, market participants widen the spread for two reasons: (1) to reduce the high risk of loss during the stable period, and (2) to prevent investors from trading at such a time, because a large number of transactions increases the risk for market makers caught on the wrong side of trade.
Posting Komentar
Posting Komentar