# How to Calculate Spread

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The word "spread" has several different meanings in investing, and can apply to stocks, bonds, or options. Here's a rundown of the various uses of the term, and how each type of spread can be calculated.

When you check a stock quote, in addition to the last trade price, you'll see two other prices known as the "bid" and the "ask." The bid price represents the highest price someone is currently willing to pay for the stock, while the ask price represents the lowest price someone is willing to sell the stock for.

Simply put, the difference between the two prices is known as the spread.

In general, larger companies whose stocks have high volumes tend to have low spreads sometimes just a penny or two. On the other hand, stocks of smaller companies with relatively low volume may high much higher spreads.

The word "spread" is also used when talking about debt securities, such as bonds or CDs. The calculation for a yield spread is essentially the same as for a bid-ask spread simply subtract one yield from the other.

For example, if the market rate for a five-year CD is 5% and the rate for a one-year CD is 2%, the spread is the difference between them, or 3%.

Yield spreads are often expressed in basis points, and a 1% difference in yield is equal to 100 basis points. So, the yield spread between two bonds -- one paying 5% and one paying 4.8% could be stated as either 0.2% or 20 basis points.