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A spread refers to the difference between two prices, rates, or yields in financial markets. Common types include the bid-ask spread, which is the difference between the price a buyer is willing to pay (bid) and the price a seller is asking (ask) for an asset. Spreads can also refer to the yield difference between two bonds or interest rates. A tighter spread indicates higher liquidity, while a wider spread often signals higher risk or lower liquidity.
In a stock trade, if the bid price is $50 and the ask price is $51, the spread is $1.
• The difference between two prices, rates, or yields.
• Can refer to bid-ask spreads, interest rate spreads, or yield spreads.
• A smaller spread typically indicates higher liquidity.
Liquidity, market volatility, and supply-demand imbalances can all affect the size of a spread.
Narrower spreads reduce trading costs, allowing traders to buy or sell with less price difference between the bid and ask.
A smaller spread indicates high liquidity, meaning there are plenty of buyers and sellers, while a larger spread suggests lower liquidity.
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