Today, we decided to bring you a brief overview of the bid/ask spread of the Croatian, and Slovenian companies, based on their broadest indices, with data since the beginning of 2022.
First of all, what is a bid/ask spread? In simplest terms, the bid/ask spread is the difference between the highest price a buyer is willing to pay, the “bid” price, and the lowest price a seller is willing to accept, the “ask” price. The narrowness or wideness of this spread then is important to investors of a given stock. This is because of what this narrowness/wideness represents. A stock that has a narrow bid/ask spread is usually a liquid (or rather, more liquid stock) as compared to other stocks on a given market, meaning that there are more people that are willing to trade it, on both sides, and thus the difference between the bid and ask sides is narrower. This means that the costs of purchasing/selling the shares of a given stock are lower, which in turn, also promotes the attractiveness of a stock. Besides investors themselves, companies can employ market makers for their stocks, who effectively reduce the bid/ask spread of stock, thus in turn attracting more investors.
On the other hand, stocks with wider bid/ask spreads are less liquid, and the costs of investment into them are thus inherently larger, due to the larger difference any investor has to pay to either invest or sell their position. Also, stocks with the larger bid/ask spread usually have less turnover, meaning that it’s not only more expensive to invest in them, but it is also harder to invest a larger amount of money without influencing the stock price significantly, and it’s also harder to sell your position (especially a larger position!).
With that out of the way, what are the average bid/ask spreads of Croatian and Slovenian companies?
Average bid/ask spread of CROBEX constituents (2022 – 2023 YTD, %)
Source: Bloomberg, InterCapital Research
For Croatia, we decided to look at the broadest index that is representative of the larger amount of the Croatian equity market, CROBEX. Out of the observed companies, the largest average bid/ask spread is recorded by FTB Turizam, at 3.96%. Following them, we have Jadroplov at 3.67%, Ingra, at 3.34%, and Plava Laguna, at 3.21%. This would mean that investing in these stocks would be significantly more expensive from the get-go due to the difference in the prices, and it could also be said that the liquidity and turnover of these stocks are quite low. On the other hand, the lowest average bid/ask spread is recorded by Hrvatski Telekom, at 0.47%, followed by Valamar Riviera at 0.55%, and Atlantska Plovidba at 0.57%. Following them, we have Adris (pref.) at 0.65%, Podravka at 0.73%, and ZABA and SPAN, both at 0.87%, respectively. All of these companies, except for Atlantska Plovidba and ZABA, employ a market maker but are also some of the most traded stocks on the ZSE. When it comes to Atlantska Plovidba and ZABA, their stories are a bit different. For Atlantska Plovidba, even though they do not have a market maker, it is one of the most liquid stocks on the exchange, with a lot of investor participation. ZABA on the other hand has a really small free float of less than 4% (free float being the number of shares that can be traded on the exchange at any given time), and as such, the price movements when any trade happens will not change much.
Average bid/ask spread of SBITOP constituents (2022 – 2023 YTD, %)
Source: Bloomberg, InterCapital Research
Moving on to Slovenia, the largest average bid/ask spreads are recorded by Equinox, at 5.36%, Unior, at 4.77%, and Luka Koper, at 1.55%. Several things have to be noted here; even though the Ljubljana Stock Exchange (LJSE) has far fewer listed companies, and SBITOP itself has fewer companies compared to CROBEX, the majority of the companies in the index, especially the larger weight ones have a quite decent turnover and liquidity. Furthermore, one can also see the effect of the market makers on the bid/ask spread here; the first 3 mentioned companies are the only ones that do not have a market maker, and their turnover and liquidity will also be inherently lower. On the other hand, Krka has the lowest average bid/ask spread at 0.51%, followed by Triglav at 0.64%, NLB at 0.68%, and Petrol, at 0.75%.
What can be taken away from this data is that the relationship between the bid/ask spread, liquidity, and turnover is a 3-way street. Improvements in any of these factors could lead to improvements in the remaining factors. However, influencing liquidity is quite hard when the bid/ask spread is large, and there are not a lot of investors willing to invest in a certain stock. Influencing turnover can be done, but this again would come at a much higher cost if the stock is illiquid and the bid/ask spread is large. What can then be said is that the reduction in the bid/ask spread is the first thing a company could do to improve its position in the market.
Of course, this is only talking about the market conditions of a given company’s stock, and not taking into account a company’s business results, business environment, opportunities for growth, corporate governance, transparency, and many other qualities a potential company should have (or strive to have/improve) in order to attract more investors.
