Calculation of Spread in Stock Market

What is the spread?

The spread corresponds to the difference between the best purchase price (ask) and the best sale price ( bid ) on a financial asset . It is therefore the price at which you can buy or sell an asset in the case of a market order . The bid price (maximum price at which a seller is ready to sell the asset) is always higher than the sell price (maximum price at which a buyer is ready to buy the asset).

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The spread in practice

The size of the spread is generally expressed in points, except for Forex or we speak in terms of pip.Take the example of an asset whose listing is as follows: 98.30 / 98.35.
98.30 is the price at which you can sell the asset
98.35 is the price at which you can buy the assetTo calculate the spread, you simply subtract the bid price from the sell price . In this case, the spread is 0.05 point (98.35-98.30)When you take a position on a financial instrument, you are therefore generally the loser of the spread . If we take our example again, the price must go up 0.05 points for your operation to be null. You pay the

What factors influence the spread?

Two factors come into play in the evolution of the spread:-

Volatility

: The more volatile an asset, the higher the spread. This is particularly the case during major economic announcements or during periods of nervousness on the financial markets. On a volatile asset, the variations have a greater amplitude and are often done in spurts.-

Liquidity

: the more liquid an asset, the lower the spread. Indeed, there are more buyers and sellers, which increases the number of transactions. On an asset with high liquidity , the transaction volumes are higher.It is for these reasons that not all assets have the same spread. The spread of an asset is constantly changing as a function of these two factors.

The spread: a means of remuneration

On all types of assets, there is a spread. The spread allows certain brokers to get paid, especially in over-the -counter markets such as Forex, commodities and derivatives . Indeed, in these markets, the broker can spread (widen) the spread on the products he offers to his clients.In Forex, for example, banks are providers of liquidity for all brokers. They allow brokers to have access to the interbank market (where transactions take place), governed by the law of supply and demand.

To get paid, the broker will rule out the market spreadon each currency pair. Thus, if the EUR / USD scores 1.3001 / 1.3002 on the interbank market, the broker's clients will for example see the following quotation on their trading platform: 1.3000 / 1.3004. The difference between the price offered on the interbank market and on the trading platform therefore belongs to the broker. It's his commission. He touches her on each transaction made by his customers.In organized and regulated markets , brokers do not use the spread to get paid but charge their clients transaction fees (generally as a% of the volume traded).