Proportional Spread

AAA

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.

INVESTOPEDIA EXPLAINS '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.

RELATED TERMS
  1. Ask

    The price a seller is willing to accept for a security, also ...
  2. Ask Size

    The amount of a security that a market maker is offering to sell ...
  3. Liquidity Ratios

    A class of financial metrics that is used to determine a company's ...
  4. Bid Size

    The number of shares being offered for purchase at a specified ...
  5. Illiquid

    The state of a security or other asset that cannot easily be ...
  6. Bid-Ask Spread

    The amount by which the ask price exceeds the bid. This is essentially ...
RELATED FAQS
  1. Why are the bid and ask quotes usually so far away from each other in after-hours ...

    After-hours trading is defined as the exchange of securities outside of an exchange's specified regular trading hours (usually ... Read Full Answer >>
  2. What is the theory of asymmetric information in economics?

    The theory of asymmetric information was developed in the 1970s and 1980s as a plausible explanation for common phenomena ... Read Full Answer >>
  3. How does market risk differ from specific risk?

    Market risk and specific risk are two different forms of risk that affect assets. All investment assets can be separated ... Read Full Answer >>
  4. How is perpetuity used in the Dividend Discount Model?

    The basic dividend discount model (DDM) creates an estimate of the constant growth rate, in perpetuity, expected for dividends ... Read Full Answer >>
  5. How valid is the notion of economies of scope?

    The concept of economies of scope is widely accepted in both managerial and theoretical economics. It proposes that it is ... Read Full Answer >>
  6. How can a company resist a hostile takeover?

    Several different defense strategies can be applied by existing corporate boards to ward off a hostile takeover. The most ... Read Full Answer >>
Related Articles
  1. Investing Basics

    The Basics Of The Bid-Ask Spread

    The bid-ask spread is essentially a negotiation in progress. To be successful, traders must be willing to take a stand and walk away in the bid-ask process through limit orders.
  2. Trading Strategies

    Setting Vs. Getting: What Is A Price-Taker?

    Learn how the economic term "price taker" may separate investors from traders.
  3. Options & Futures

    Don't Let Brokerage Fees Undermine Your Returns

    Smart investors don't give away more money than necessary in commissions and fees. Find out how to save.
  4. Economics

    What Is Supply?

    Supply is the amount of goods a producer is willing to produce at a given price, and is one of the most basic concepts in economics.
  5. Economics

    Modified Internal Rate of Return (MIRR)

    Modified internal rate of return (MIRR) is a variant of the more traditional internal rate of return calculation.
  6. Economics

    Understanding the Fisher Effect

    The Fisher effect states that the real interest rate equals the nominal interest rate minus the expected inflation rate.
  7. Fundamental Analysis

    Explaining the Geometric Mean

    The average of a set of products, the calculation of which is commonly used to determine the performance results of an investment or portfolio.
  8. Economics

    Where To Search For Yield Today

    It’s hard to miss that there has been a pronounced slowdown in the U.S. economy this year.
  9. Economics

    What is the Private Sector?

    The private sector encompasses all for-profit businesses that are not owned or operated by the government.
  10. Economics

    Understanding Perpetuity

    Perpetuity means without end. In finance, a perpetuity is a flow of money that will be received on a regular basis without a specified ending date.

You May Also Like

Hot Definitions
  1. Fiduciary

    1. A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets ...
  2. Expected Return

    The amount one would anticipate receiving on an investment that has various known or expected rates of return. For example, ...
  3. Carrying Value

    An accounting measure of value, where the value of an asset or a company is based on the figures in the company's balance ...
  4. Capital Account

    A national account that shows the net change in asset ownership for a nation. The capital account is the net result of public ...
  5. Brand Equity

    The value premium that a company realizes from a product with a recognizable name as compared to its generic equivalent. ...
Trading Center