In financial markets, the price at which you can sell an asset is referred to as a bid, while the price at which you can readily purchase is known as ask. The smaller the difference between the bid and ask prices, also known as the spread, the more liquid the financial asset in question is said to be. Investors prefer liquid assets because they take less of a financial hit when buying and selling them.
Enter the ticker symbol, which is the abbreviation for the asset, in the search bar of a finance portal such as Yahoo Finance or Google Finance, or type the name of the asset in the search box. The bid and ask prices are easily available for publicly traded stocks, bonds, options and commodities such as gold, as well as foreign currencies. Sometimes, the bid and ask prices will be clearly labeled, while in other instances they will be separated by a dash or slash. The bid and ask prices for a particular asset may be given as $31.25-$31.50, for example, or as $31.25 / $31.50. The lower price is always the bid, while the higher price is the ask.
Subtract the ask from the bid. The difference between the bid and ask prices is the spread. In a stock that has a bid and ask of $31.25 and $31.50, respectively, the spread equals $31.50 - $31.25, or 25 cents. Keep in mind that the spread changes depending on the time of day, week and year. The more actively a financial asset is traded, the smaller the spread will be. In stocks, for example, the spread is usually smallest near the end of the day when a large quantity of shares change days, and a little larger during midday when trading is relatively less active.
Divide the spread by the ask and multiply the result by 100 to express the spread as a percentage. In the example the spread is 25 cents, while the ask is $31.50. 0.25/31.5 x 100 = 0.79 percent. In other words, if you were to buy one share and then turn around and sell it immediately, you would lose 0.79 percent of your investment. This turnaround would involve buying at $31.50 and selling at $31.25, and the associated loss of 25 cents corresponds to 0.79 percent of the investment, which is $31.50.
Hunkar Ozyasar is the former high-yield bond strategist for Deutsche Bank. He has been quoted in publications including "Financial Times" and the "Wall Street Journal." His book, "When Time Management Fails," is published in 12 countries while Ozyasar’s finance articles are featured on Nikkei, Japan’s premier financial news service. He holds a Master of Business Administration from Kellogg Graduate School.