Question

Suppose a security has a bid price of $100 and an ask price of $100.12. At what price can the market-maker purchase a security? At what price can a market-maker sell a security? What is the spread in dollar terms when 100 shares are traded

Answer 1

Answer:

$12

Explanation:

Consider the situation of a security, for which the prices quoted are as follows: bid price is $100, and the ask price is $100.12. Now, one should know that the price of a stock is not just one figure. In fact there are two prices always associated with every stock – the bid price, which is the price at which the stock can be sold in the stock market; and the ask price (also called the offer price), the price at which the stock can be bought from the market. The market-maker would always be interested in the bid-ask spread for the stock at any point in time, which is the difference between the two prices.

Comment

Step 2 of 4

So by looking at the situation of the security at hand, the price at which the market-maker would purchase the security would be:

the bid price, which is.

Comments (3)

Step 3 of 4

And by looking at the situation of the security, the price at which a market-maker would sell the security would be:

the ask price, which is .

Comment

Step 4 of 4

The market makers Bid - Ask spread, or the quantified difference between the two (the bid amount and the ask amount) for 100 shares of the secutiry would be:

= Selling price – Buying Price

(100.12-100)x100

=$12