Proportional Spread

DEFINITION of 'Proportional Spread'

A measure of a security's liquidity that is calculated by comparing the bid and ask prices quoted in the marketplace. The proportional spread is higher as liquidity decreases to compensate the dealer for the additional risk of creating a market in an illiquid security.

The proportional spread is calculated as the difference between closing ask and bid prices divided by the average price of the bid and ask.

Proportional Spread



Ask = Highest close in month
Bid = Lowest close in month

Also referred to as a proportional bid-ask spread.

BREAKING DOWN 'Proportional Spread'

The proportional spread is used to give an idea of the average round-trip transaction compensation to dealers. The average transaction cost to the investor is calculated as one-half of the proportional spread. In general, proportional spreads can range from less than 1% to over 5%. For example, the average proportional spread on the New York Stock Exchange was 0.6% in 2003.

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RELATED FAQS
  1. What types of stocks have a large difference between bid and ask prices?

    Find out which factors influence bid-ask spread width. Learn why some stocks have large spreads between bid and ask prices, ... Read Answer >>
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    Stock exchanges are set up to assist brokers and other specialists in coordinating bid and ask prices. The bid price is the ... Read Answer >>
  3. What types of stocks have a small difference between bid and ask prices?

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