Difference between bid-ask spread and bid-ask bounce

Even though both the bid-ask spread and the bid-ask bounce are connected to the bid-ask price of a stock or other type of investment, they are two entirely different concepts.

·        The bid-ask spread signifies the basic transaction cost that relates to obtaining an investment.

·        The bid-ask bounce refers to a very specific condition of irregularity.

Along with commission or other fees, the bid-ask spread signifies the basic transaction cost of trading.

The bid price is the main amount that buyers are ready to pay, while the ask price is the smallest amount at which sellers are ready to sell a share or additional investment asset.

The  difference between the bid and ask prices is called Spread. For instance, if the bid price of the stock is $70 and the  ask price is $71, then that means the spread is $1.

The size of the spread usually differs according to the trading resources of the asset. Highly traded resources offer small spreads between bid and ask prices, but lightly traded markets have considerably higher spreads. When retail dealers want to buy a stock, they have to pay the ask price, and when they want to sell, they must do so at the bid price.

Traders should pay close attention to the bid-ask spread because it signifies a substantial hidden business deal cost.

Even though the spread is not a definite payment that traders are charged, it is still a part of the cost of trading. Attaining good spreads can meaningfully increase a trader’s profit margin, while trading with extreme spreads can, all by itself remove much of a trader’s net gains.

The bid-ask bounce refers to an exact condition in which the price of a stock or other assets bounces quickly back and forth within the very limited range between the bid price and ask price.

The bid price increases to become equal to what the sell price was just a moment before, then falls back to its original level.

Review the bid-ask spread example from above, in a bid-ask bounce situation, the bid price would bounce very fast back and forth between $70 and $71.

Supply and Demand

Investors should understand first the idea of supply and demand before learning the Ins and Out of the spread.

·        Supply means the capacity or abundance of a particular piece in the marketplace, just              like the supply of stock for sale.

·        Demand means the individual’s readiness to pay a specific price for an item or stock.

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