Why divide by ask rate to get the spread?
"Mathematically it's arbitrary - you could just as easily use the bid or the midpoint as the denominator, so long as you're consistent when comparing securities.  So there's not a fundamental reason to use the ask.  The best argument I can come up with is that most analysis is done from the buy side, so looking at liquidity costs (meaning how much does the value drop instantaneously purely because of the bid-ask spread) when you buy a security would be more relevant by using the ask (purchase price) as the basis. Meaning, if a stock has a bid-ask range of $95-$100, if you buy the stock at $100 (the ask), you immediately ""lose"" 5% (5/100) of its value since you can only sell it for $95."
A bid is an offer to buy something on an order book, so for example you may post an offer to buy one share, at $5. An ask is an offer to sell something on an order book, at a set price. For example you may post an offer to sell shares at $6. A trade happens when there are bids/asks that overlap each other, or are at the same price, so there is always a spread of at least one of the smallest currency unit the exchange allows. Betting that the price of an asset will go down, traditionally by borrowing some of that asset and then selling it, hoping to buy it back at a lower price and pocket the difference (minus interest). So, let's say as per your example you borrow 100 shares of company 'X', expecting the price of them to go down. You take your shares to the market and sell them - you make a market sell order (a market 'ask'). This matches against a bid and you receive a price of $5 per share. Now, let's pretend that you change your mind and you think the price is going to go up, you instantly regret your decision. In order to pay back the shares, you now need to buy back your shares as $6 - which is the price off the ask offers on the order book. Because of this spread, you have lost money. You sold at a low price and bought at a high price, meaning it costs you more money to repay your borrowed shares. So, when you are shorting you need the spread to be as tight as possible. If you do this, you own a stock worth $1, with a basis of $2. The loss doesn't get realized until the shares are sold. Of course, we hope you see the stock increase above that price, else, why do this? Simply because forex brokers earn money from the spread that they offer you. Spread is the difference between buyers and sellers. If the buy price is at 1.1000 and the sell price is at 1.1002 then the spread is 2 pips. Now think that this broker is getting spread from its liquidity cheaper (for example 1 pip spread). As you can understand this broker makes a profit of 1 pip for each trade you place... Now multiply 1 pip X huge volume, and then you will understand why most forex brokers don't charge commissions. This has never really adequately explained it for me, and I've tried reading up on it all over the place. For a long time I thought that in a trade, the market maker pockets the spread *for that trade*, but that's not the case.  The only sensible explanation I've found (which I'm not going to give in full...) is that the market maker will provide liquidity by buying and selling trades they have no actual view on (short or long), and if the spread is higher, that contributes directly to the amount they make over time when they open and close positions they've made.  It would be great to see a single definitive example somewhere that shows how a market maker makes money. I did a historical analysis a few years back of all well-known candlestick patterns against my database of 5 years worth of 1-minute resolution data of all FTSE100 shares.  There wasn't a single pattern that showed even a 1% gain with 60% reliability.  Unfortunately I don't have spread data other than for a handful of days where I recorded live prices rather than minutely summaries, but my suspicion is that most of the time you wouldn't even earn back the spread on such a trade. "First, what structure does your index fund have?  If it is an open-end mutual fund, there are no bid/ask spread as the structure of this security is that it is priced once a day and transactions are done with that price.  If it is an exchange-traded fund, then the question becomes how well are authorized participants taking advantage of the spread to make the fund track the index well?  This is where you have to get into the Creation and Redemption unit construct of the exchange-traded fund where there are ""in-kind"" transactions done to either create new shares of the fund or redeem out shares of the fund.  In either case, you are making some serious assumptions about the structure of the fund that don't make sense given how these are built. Index funds have lower expense ratios and are thus cheaper than other mutual funds that may take on more costs.  If you want suggested reading on this, look at the investing books of John C. Bogle who studied some of this rather extensively, in addition to being one of the first to create an index fund that became known as ""Bogle's Folly,"" where a couple of key ones would be ""Common Sense on Mutual Funds: New Imperatives for the Intelligent Investor"" and ""Bogle on Mutual Funds: New Perspectives for the Intelligent Investor."" In the case of an open-end fund, there has to be a portion of the fund in cash to handle transaction costs of running the fund as there are management fees to come from running the fund in addition to dividends from the stocks that have to be carefully re-invested and other matters that make this quite easy to note.  Vanguard 500 Index Investor portfolio(VFINX) has .38% in cash as an example here where you could look at any open-end mutual fund's portfolio and notice that there may well be some in cash as part of how the fund is managed.  It’s the Execution, Stupid would be one of a few articles that looks at the idea of ""tracking error"" or how well does an index fund actually track the index where it can be noted that in some cases, there can be a little bit of active management in the fund. Just as a minor side note, when I lived in the US I did invest in index funds and found them to be a good investment.  I'd still recommend them though I'd argue that while some want to see these as really simple investments, there can be details that make them quite interesting to my mind. How is its price set then? The price is computed by taking the sum value of all the assets of the fund minus the liabilities and divided by the number of outstanding shares.  The price of the assets would include the closing price on the stock rather than a bid or ask, similar pricing for bonds held by the fund, derivatives and cash equivalents.  Similarly, the liabilities would be costs a fund has to pay that may not have been paid yet such as management fees, brokerage costs, etc. Is it a weighted average of all the underlying stock spreads, or does   it stand on its own and stems from the usual supply & demand laws ? There isn't any spread used in determining the ""Net Asset Value"" for the fund.  The fund prices are determined after the market is closed and so a closing price can be used for stocks. The liabilities could include the costs to run the fund as part of the accounting in the fund, that most items have to come down to either being an asset, something with a positive value, or a liability, something with a negative value. Something to consider also is the size of the fund.  With over $7,000,000,000 in assets, a .01% amount is still $700,000 which is quite a large amount in some ways." There are several ways that the issuers profit from CFDs. If the broker has trades on both sides (buy and sell) they can net the volumes off against each other and profit off the spread whilst using the posted margins to cover p&l from both sides. Because settlement for most securities is not on the same day that the order is placed they can also buy the security with no intention of taking delivery and simply sell it off at the end of day to pass delivery on to someone else. Here again they profit from the spread and that their volumes give them really low commissions so their costs are much lower than the value of the spread. If they have to do this rather than netting the position out the spreads will be wider.  Sometimes that may be forced to buy the security outright but that is rare and the spreads will be even wider so that they can make a decent profit. The main reason is that you move from the linear payoff structure to a non-linear one. This is called convexity in finance. With options you can design a payoff structure in almost any way to want it to be. For example you can say that you only want the upside but not the downside, so you buy a call option. It is obvious that this comes at a price, the option premium. Or equivalently you buy the underlying and for risk management reasons buy a put option on top of it as an insurance. The price of the put could be seen as the insurance premium. You can of course combine options in more complicated ways so that you e.g. profit as long as the underlying moves strongly enough in either direction. This is called a straddle. See this link...I was also looking an answer to the same questions. This site explains with an example  http://www.independent-stock-investing.com/PE-Ratio.html Assuming you plan to buy a whole number of shares and have a maximum dollar value you intend to invest, it may be better to wait for the split if the figures don't quite work out nicely. For example, if you are going to invest $1,000 and the stock pre-split is $400 and the split is 2 for 1, then you'd buy 2 shares before the split unless you have an extra $200 to add. Meanwhile, after the split you could buy 5 shares at $200 so that you invest all that you intend. Aside from that case, it doesn't really make a difference since the split is similar to getting 2 nickels for a dime which in each case is still a total value of 10 cents. Actually, total return is the most important which isn't necessarily just price change as this doesn't account for dividends that may be re-invested.  Thus, the price change isn't necessarily that useful in terms of knowing what you end up with as an ending balance for an investment. Secondly, the price change itself may be deceptively large as if the stock initial price was low, e.g. a few dollars or less adjusting for stock splits as most big companies will split the stock once the price is high enough, then the percentages can be quite large years later. Something else to consider is the percentage change would be based on what as the initial base.  The price at the start of the chart or something else?  Carefully consider what you want the initial starting point to be in determining price shifts here as one could take either end and claim a rationale for using it. Most people want to look at the price to get an idea of what would X shares cost to purchase rather than look at the percentage change from day to day. G spread - you have a 5.5 year bond, you take your yield minus the yield on the 5.5y point (interpolated) of the benchmark sovereign curve. Think of G = Government.      I Spread - same as G Spread but you use the relevant Swap Curve. E.g. USD bond, compare against the USD Swaps curve. I = interpolated.      Z Spread - stands for zero volatility curve spread. You strip the swaps curve to get zero rates (i.e. Zero coupon rates for each tenor), then find the constant spread on top of each part of the curve's zero rates to arrive at your bond's yield.      In G and I Spread, you're basically discounting the bond's cash flows using one rate (i.e. The interpolated yield on the curve). With Z Spread, you're discounting using the entire portion of the curve that's relevant to your bond's maturity. I was typing up a long response and lost it to a backspace.. so, I apologize but I don't intend on rewriting it all.  You'll have to use a method called bootstrapping to get the forward rates.  Essentially you're looking at the spot rate today, and the forward rates, then filling in what must be the rate to make them equal out in the end.  Sorry I'm not more help! As you probably know, a credit spread involves buying a call (or put) at one strike and selling another call (or put) at another with the same maturity, so you're dealing with two orders. Your broker will likely have to fill this order themselves, meaning that they'll have to look at the existing bid/asks for the different strikes and wait until the difference matches (or exceeds) your limit order.  Obviously they can't place limit orders on the legs individually since they can't guarantee that they will both be executed.  They also don't care what the individual prices are; they just care what the difference is.  It's possible that they have computer systems that examine existing bids and asks that would fill your order, but it's still done by the broker, not the exchange.  The exchange never sees your actual limit order; they will just see the market orders placed by your broker. "This is a misconception. One of the explanations is that if you buy at the ask price and want   to sell it right away, you can only sell at the bid price. This is incorrect. There are no two separate bid and ask prices. The price you buy (your ""bid"") is the same price someone else sells (their ""sell""). The same goes when you sell - the price you sell at is the price someone else buys. There's no spread with stocks. Emphasized it on purpose, because many people (especially those who gamble on stock exchange without knowing what they're doing) don't understand how the stock market works. On the stock exchange, the transaction price is the match between the bid price and the ask price. Thus, on any given transaction, bid always equals ask. There's no spread. There is spread with commodities (if you buy it directly, especially), contracts, mutual funds and other kinds of brokered transactions that go through a third party. The difference (spread) is that third party's fee for assuming part of the risk in the transaction, and is indeed added to your cost (indirectly, in the way you described). These transactions don't go directly between a seller and a buyer. For example, there's no buyer when you redeem some of your mutual fund - the fund pays you money. So the fund assumes certain risk, which is why there's a spread in the prices to invest and to redeem. Similarly with commodities: when you buy a gold bar - you buy it from a dealer, who needs to keep a stock. Thus, the dealer will not buy from you at the same price: there's a premium on sale and a discount on buy, which is a spread, to compensate the dealer for the risk of keeping a stock."