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. Liquidity Ratios

    A class of financial metrics that is used to determine a company's ...
  2. Ask

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

    The amount of a security that a market maker is offering to sell ...
  4. Bid-Ask Spread

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

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

    1. An offer made by an investor, a trader or a dealer to buy ...
Related Articles
  1. The Basics Of The Bid-Ask Spread
    Investing Basics

    The Basics Of The Bid-Ask Spread

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

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

  3. Don't Let Brokerage Fees Undermine Your ...
    Options & Futures

    Don't Let Brokerage Fees Undermine Your ...

  4. Why are the bid and ask quotes usually ...
    Investing

    Why are the bid and ask quotes usually ...

comments powered by Disqus
Hot Definitions
  1. Accounts Payable - AP

    An accounting entry that represents an entity's obligation to pay off a short-term debt to its creditors. The accounts payable ...
  2. Ratio Analysis

    Quantitative analysis of information contained in a company’s financial statements. Ratio analysis is based on line items ...
  3. Days Payable Outstanding - DPO

    A company's average payable period. Calculated as: ending accounts payable / (cost of sales/number of days).
  4. Net Sales

    The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any ...
  5. Over The Counter

    A security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, etc. The phrase "over-the-counter" ...
  6. Earnings Before Interest After Taxes - EBIAT

    A financial measure that is an indicator of a company's operating performance. EBIAT, which is equivalent to after-tax EBIT ...
Trading Center