A:

Although both the bid-ask spread and the bid-ask bounce relate to the bid-ask price of a stock or other investment, they refer to two completely different concepts. The bid-ask spread represents the basic transaction cost that applies to acquiring an investment, and the bid-ask bounce refers to a very specific condition of volatility.

The bid-ask spread, along with commissions or other fees, represents the basic transaction cost of trading. The bid price is the highest price buyers are willing to pay, and the ask price is the lowest price at which sellers are willing to sell a stock or other investment asset.

The spread is the difference between the bid and ask prices. For example, if the bid price on a stock is $50 and the ask price is $51, then the spread is $1. The size of the spread commonly varies in accordance with the trading liquidity of the asset. Highly traded assets offer minimal spreads between bid and ask prices, but thinly traded markets have significantly higher spreads. When retail traders 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 pay close attention to the bid-ask spread because it represents a significant hidden transaction cost. Although the spread is not a specific fee that traders are charged, it is nonetheless part of the cost of trading. Obtaining good spreads can significantly increase a trader's profit margin, whereas trading with excessive spreads can all by itself erase much of a trader's net gains.

The bid-ask bounce refers to a specific situation wherein the price of a stock or other asset bounces rapidly back and forth within the very limited range between the bid price and ask price. In effect, the bid price jumps to become equal to what the sell price was just a moment before, then drops back to its original level. Using the bid-ask spread example from above, in a bid-ask bounce situation, the bid price would bounce very quickly back and forth between $50 and $51.

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