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.

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RELATED FAQS
  1. What are the determinants of a stock's bid-ask spread?

    Stock exchanges are set up to assist brokers and other specialists in coordinating bid and ask prices. The bid price is the ... Read Answer >>
  2. 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 >>
  3. 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 >>
  4. What's the difference between bid-ask spread and bid-ask bounce?

    Understand the difference between the bid-ask spread that determines the buy or sell price for a stock and a bid-ask bounce, ... Read Answer >>
  5. How do I use the bid-ask spread to evaluate whether I should buy a particular stock?

    Understand the significance of the bid-ask spread for investors in making a decision on whether or not to purchase a particular ... Read Answer >>
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