What does the bid/ask spread represent?

What does the bid/ask spread represent?

• A. The difference between the highest price a buyer is willing to pay (bid) and the lowest price a seller will accept (ask).
• B. The average price at which trades occur during the day.
• C. The total volume of trades for a security.
• D. The difference between the closing price and the opening price.

Answer: (A)

The bid/ask spread measures market liquidity and the cost to trade. It is the difference between the best bid—the highest price buyers are willing to pay—and the best ask—the lowest price sellers are willing to accept. For example, if the best bid is 100 and the best ask is 100.50, the spread is 0.50. A smaller spread means a more liquid market and cheaper trades; a larger spread means less liquidity and higher trading costs. The other options describe different concepts: an average trade price, total traded volume, or the change from close to open, none of which capture the gap between the two quoted prices.

The bid/ask spread measures market liquidity and the cost to trade. It is the difference between the best bid—the highest price buyers are willing to pay—and the best ask—the lowest price sellers are willing to accept. For example, if the best bid is 100 and the best ask is 100.50, the spread is 0.50. A smaller spread means a more liquid market and cheaper trades; a larger spread means less liquidity and higher trading costs. The other options describe different concepts: an average trade price, total traded volume, or the change from close to open, none of which capture the gap between the two quoted prices.