Example (made-up numbers)
| Share example | Currency pair example |
|---|
| Bid | $20.00 | 1.1000 |
| Ask | $20.05 | 1.1002 |
| Spread | $0.05 per share | 0.0002 (2 pips) |
| Quantity | 100 shares | 100,000 units of the base currency |
| Spread cost of one round trip | 100 x $0.05 = $5.00 | 100,000 x 0.0002 = 20.00 in the quote currency (USD here) |
| Spread in percent of mid price | 0.05 / 20.025 x 100 = about 0.25% | |
What this means: if you bought at the ask and sold a moment later at the bid, with the prices unchanged, you would be down $5.00 on the share trade. The price must move by at least the spread just for you to break even before any other costs.
Try it now
Using made-up quotes, fill a three-row table: bid, ask, spread, quantity, spread cost and spread percent. Use (1) bid $50.00 / ask $50.10 for 20 shares, (2) bid $5.00 / ask $5.02 for 500 shares, (3) your own example from a practice screen. (Answers for 1 and 2: $2.00 and $10.00.)
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I'm learning "Trading Costs: spreads, commissions, swaps, rebates and cashback (education only)" on The Future Market. Lesson 1: "The bid/ask spread and how to measure it".
What the lesson teaches:
- Bid = the highest price a buyer will pay right now (the price you can sell at). Ask (or offer) = the lowest price a seller will accept (the price you can buy at). Spread = ask - bid.
- FINRA explains that bid-ask spreads represent the difference between the highest price a buyer will pay and the lowest price a seller will accept, and that for exchange-traded products the spread "might be almost zero for some ETPs but much wider for other products".
- The spread is a cost even when no commission is charged. The OSC (GetSmarterAboutMoney) notes it can be "a more significant cost if you trade frequently".
- Spreads can widen around big news (course 5.6, Lesson 5).
- Formula. Spread cost of a round trip (buy, then sell at the same quoted prices) = spread x quantity. Spread in percent = spread / mid price x 100, where mid price = (bid + ask) / 2.
The exercise I'm working on:
Using made-up quotes, fill a three-row table: bid, ask, spread, quantity, spread cost and spread percent. Use (1) bid $50.00 / ask $50.10 for 20 shares, (2) bid $5.00 / ask $5.02 for 500 shares, (3) your own example from a practice screen. (Answers for 1 and 2: $2.00 and $10.00.)
I'm stuck. Please:
1. Explain the main idea in plain, simple words with one everyday example.
2. Walk me through the exercise one small step at a time. Ask me what I've done so far before giving the next step.
3. Don't just give me the final answer. Help me do it myself, and check my work when I share it.
4. This is for learning only. Remind me to check with a licensed professional before I make a real decision about my own money, health or legal situation.
I'm a parent helping my child (about 8 years old) with a lesson called "The bid/ask spread and how to measure it" from the course "Trading Costs: spreads, commissions, swaps, rebates and cashback (education only)".
Here's what the lesson says:
At a money exchange booth at the airport, the booth buys your dollars for one price and sells dollars for a higher price. The gap between those two prices is how the booth gets paid. In trading, that gap is called the spread, and you pay it every time you buy and then sell.
The activity:
Using made-up quotes, fill a three-row table: bid, ask, spread, quantity, spread cost and spread percent. Use (1) bid $50.00 / ask $50.10 for 20 shares, (2) bid $5.00 / ask $5.02 for 500 shares, (3) your own example from a practice screen. (Answers for 1 and 2: $2.00 and $10.00.)
Please explain this so an 8-year-old understands: short sentences, a fun everyday example, and no hard words.
Then give me 3 simple questions I can ask my child to check they understood, and a way to do the activity together, one tiny step at a time.
Keep it general and educational. This is not advice for a real situation.