Price Tension

DEFINITION of 'Price Tension'

The phenomenon by which the seller of a particular good, service or security desires to maximize the selling price, while the buyer desires to minimize the purchasing price. Generally speaking, the greater the price tension within a particular market, the greater the bid-ask spread.

BREAKING DOWN 'Price Tension'

Price tension tends to decrease liquidity and create price stickiness. If price tension is relatively large within a particular market or exchange, there will be larger bid-ask spreads. Sellers will be asking for more than what the vast majority of buyers are willing to pay, which will drastically reduce the number of exchanges made within the market.

Having little liquidity in a given market exposes the investor to liquidity risk, which can result in drastic changes in the security's underlying value.

RELATED TERMS
  1. Price Continuity

    A characteristic of a liquid market where the price movements ...
  2. Liquidity Risk

    The risk stemming from the lack of marketability of an investment ...
  3. Liquid Market

    A market with many bid and ask offers, low spreads and low volatility. ...
  4. Ask

    The price a seller is willing to accept for a security, also ...
  5. Buyer's Market

    A situation in which supply exceeds demand, giving purchasers ...
  6. Locked Market

    A market in which a stock's bid and ask prices are identical. ...
Related Articles
  1. Investing Basics

    Understanding Liquidity Risk

    Learn about the two types of liquidity risk: funding liquidity risk and market liquidity risk.
  2. Trading Strategies

    Disadvantages of Pairs Trading

    Aside from the risks associated with pairs trading, there are a number of disadvantages to this investment technique of which traders should be aware. Perhaps the most obvious disadvantage is ...
  3. Home & Auto

    The Ins And Outs Of Seller-Financed Real Estate Deals

    There's more than one way to buy or sell a house. Seller financing presents yet another unique option.
  4. Options & Futures

    Option Spreads: Tips And Things To Consider

    By John Summa, CTA, PhD, Founder of OptionsNerd.comNow that you have obtained a solid foundation for underlying option spreads, here are some tips on how to use them. In this section, we'll ...
  5. Active Trading Fundamentals

    What Does Bid And Asked Mean?

    Bid and asked is a two-way price quotation.
  6. Home & Auto

    Ins And Outs Of Seller-Financed Real Estate Deals

    Seller financing works like this: Instead of a buyer receiving a loan from a bank, the person selling the house lends the buyer the money for the purchase.
  7. Stock Analysis

    What You Need To Know About ETF Liquidity

    Exchange-traded funds have become extremely popular over the past two decades, as investors have sought easier ways to invest across new markets and asset classes. With over a billion shares ...
  8. Stock Analysis

    Options Traders: Watch Out For This Little-Known Income Killer

    Using a covered call strategy can be a great way to generate steady returns in your portfolio. As a general rule, I expect my covered call trades to increase my capital by about 25% to 35% per ...
  9. Options & Futures

    Understanding Financial Liquidity

    Understanding how this measure works in the market can help keep your finances afloat.
  10. Options & Futures

    Trading Calendar Spreads In Grain Markets

    Futures investors flock to spreads because they hold true to fundamental market factors.
RELATED FAQS
  1. What does the variance between the bid and ask price of a stock mean?

    Find out how stocks are traded in the market, why the bid and ask prices are different and why the bid-ask spread is smallest ... Read Answer >>
  2. What types of stocks have a small difference between bid and ask prices?

    Learn more about bid-ask spreads and why stocks with high levels of liquidity and low levels of volatility usually have narrow ... Read Answer >>
  3. What number of shares determines adequate liquidity for a stock?

    Liquidity refers to how easy it is to buy and sell shares without seeing a change in price. If, for example, you bought stock ... Read Answer >>
  4. What types of stocks have a large difference between bid and ask prices?

    Find out which factors influence bid-ask spread width. Learn why some stocks have large spreads between bid and ask prices, ... Read Answer >>
  5. What are common factors that affect a security's spot rate?

    Learn the common factors influencing the spot rate for an asset including the bid-ask spread and the forward term structure ... Read Answer >>
  6. Why is it a bad idea for beginning investors to speculate in penny stocks?

    Learn about penny stocks and why their wide bid-ask spreads, lack of liquidity and transparency make it a bad idea for beginning ... Read Answer >>
Hot Definitions
  1. Demand Curve

    The demand curve is a graphical representation of the relationship between the price of a good or service and the quantity ...
  2. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  3. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  4. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  5. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  6. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
Trading Center