In trading, the spread refers to the difference between the bid price (the highest price a buyer is willing to pay) and the ask price (the lowest price a seller is willing to accept) for a security. It represents the immediate transaction cost for investors buying and selling.
Spread
Definition
In trading, the spread refers to the difference between the bid price (the highest price a buyer is willing to pay) and the ask price (the lowest price a seller is willing to accept) for a security. It represents the immediate transaction cost for investors buying and selling.
Example
If a stock has a bid price of $20.00 and an ask price of $20.05, the bid-ask spread is 5 cents, which is the immediate cost to someone buying and then immediately selling the stock.
Key Points
- 1Difference between bid and ask prices.
- 2Represents a transaction cost for traders.
- 3Narrow spreads indicate high liquidity.
- 4Wider spreads suggest lower liquidity or higher risk.
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