The bid-ask spread is the difference between the ask price and the bid price of an asset. Ask (the offer) is the minimum price a seller agrees to accept for a security, while bid is the highest price a buyer agrees to pay. The offer price of a stock, commodity, index or foreign currency always exceeds the bid price.
Why do investors have to consider the spread? In addition to commissions and fees, brokers have other charges, and bid-ask spread percentage is one of them. By knowing how to measure it, you’ll be aware of the true costs of your transaction.
Calculating the bid-ask spread is not complicated. Simply subtract Bid from Ask. To find the bid-ask spread percentage, use the following formula:
Let's check how it works and insert figures into the formula right away. Assume the stock of company CPTL trades at $19.95 (Bid)/ $20 (Ask). Therefore bid-ask spread is $20 – $19.95 = $0.05. As a percentage, this makes ($20 – $19.95) / $20 * 100% = 0.25%. In other words, if you bought one CPTL share at $20 and then sold it immediately at $19.95 (a loss of $0.05), you would lose 0.25% on the transaction.
Now, imagine that instead of one share, you buy and sell 100 shares at $19.95/$20. You’ll incur a loss of ($20 – $19.95) * 100 = $5. In the same transaction involving 1,000 shares the loss will make $50. However, in all the examples above the percentage loss from the spread will be the same – 0.25%.