The difference between the bid-ask margin and the bid-ask rebound


Although the bid-ask spread and the bid-ask rebound are related to the bid price and the bid price of a stock or other investment, the two terms refer to completely different concepts. The bid-ask spread is the difference between the bid price and the ask price. It also represents the basic transaction cost that applies to trading an investment. Supply and demand rebound refers to a very specific condition of volatility and reflects price movements between supply and demand.

Spread of supply and demand

Most of today’s financial markets (forex, options, futures, stocks) are organized so that investors can quickly see the latest prices or quotes. A quote includes the bid price and the bid price. The offer price is the highest price point where buyers are ready to buy. The ask price is the lowest price at which sellers are willing to sell a stock or other investment asset. It is also known as the offer price.

Key takeaways

  • The bid price is the highest possible price that buyers in the market are willing to pay, and the bid price is the lowest possible price that sellers are willing to receive.
  • A quote includes both the bid price and the bid price.
  • The spread between supply and demand represents a cost of doing business when investors buy and sell.
  • Active and liquid markets tend to have smaller bid and ask margins compared to thin or illiquid markets.
  • Supply and demand rebound refers to price movements between supply and demand, which may suggest that prices are moving when, in fact, the price has not changed.

The bid-ask spread is the difference between the bid and ask prices. For example, if the bid price of a stock is $ 50 and the bid price is $ 51, the spread equals $ 1. The size of the spread varies by instrument and is often seen as a An indicator of trading liquidity, as active and highly liquid markets tend to have smaller bid and ask spreads and less liquid or thin markets with wider bid and ask spreads.

Traders pay close attention to the bid-ask spread because it can represent a significant hidden transaction cost. Although the spread is not a specific fee charged to traders, it is a source of income for the market maker and part of the trading cost for the investor. Getting good spreads can significantly increase a trader’s profit margin, while trading excessive spreads can offset much of a trader’s net profit. In short, the bid-ask spread, along with commissions or other fees, represents a basic transaction cost of trading in most financial markets today.

Supply and demand rebound

Bid-ask rebound is a specific situation when the price of a stock or other asset bounces back and forth within the very narrow range between the bid price and the ask price. This happens when there are exchanges in both the bid and ask prices, but there is no real movement in the price. Rebounding can also occur when the bid price jumps to match the ask price a moment earlier, but then falls back to its original level.

Using the bid and ask example above, the bid price would rebound very quickly between $ 50 and $ 51. Now, let’s say this happens for several hours during the trading day, with the price moving between $ 50 and $ 51. The The price does not necessarily change and, therefore, there is no real movement in price. However, a $ 1 move in a $ 50 stock represents 2%.

Therefore, while the stock may appear to move 2% when it moves between a bid of $ 50 and a ask of $ 51, it does not move at all when looking at the average market price (the average of the supply and demand) of $ 50.50 per share. This is why some traders look at the size of the supply and demand bounce when trying to measure the true volatility of a stock or other investment.

www.investopedia.com

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Mark Holland

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