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. Bid-Ask Spread

    The amount by which the ask price exceeds the bid. This is essentially ...
  4. Illiquid

    The state of a security or other asset that cannot easily be ...
  5. Bid

    1. An offer made by an investor, a trader or a dealer to buy ...
  6. Bid Size

    The number of shares being offered for purchase at a specified ...
Related Articles
  1. Investing Basics

    The Basics Of The Bid-Ask Spread

  2. Trading Strategies

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

  3. Options & Futures

    Don't Let Brokerage Fees Undermine Your ...

  4. Investing

    Why are the bid and ask quotes usually ...

Hot Definitions
  1. Capitulation

    When investors give up any previous gains in stock price by selling equities in an effort to get out of the market and into ...
  2. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  3. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  4. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  5. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  6. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
Trading Center