The Bid Ask Spread is a popular measure of the liquidity and tradeability of a share. It measures the difference between the Sell Price (know as the ‘bid’) and the Buy Price (known as the ‘ask’). It is calculated as a percentage of the Mid Price and quoted in basis points.
The Spread is specifically calculated using the end of day Quote as: (Ask - Bid) / ((Ask + Bid) / 2) * 10000. Please note that 100 basis points = 1%, so if a spread is quoted as 247, the bid and ask are 2.47% apart.
Larger Spreads are seen in smaller or more illiquid shares and can make them more expensive to trade. From an investor's point of view, the spread is an extra cost, akin to the broker's commission.
Large Cap stocks tend to have very ‘tight’ spreads, often 15 or fewer basis points, while small caps can often have spreads of 500 or more. A common rule of thumb for many investors is to be wary of bid-ask spreads greater than a few hundred bps.
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