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Bid Ask Spread

The bid ask spread formula is the difference between the asking price and bid price of a particular investment. The bid ask spread may be used for various investments and is primarily used in investments that sell on an exchange.

The bid ask spread may be used to determine the liquidity of a particular investment. A higher trade volume, or higher liquidity, will generally lead to a lower bid-ask spread. One analogy could be comparing the difference in asking price and the offer price of a home or piece of art(not sold at an auction). These assets may take longer to sale and there may be less individuals looking to buy the individual's particular asset. On the other hand, stocks, commodity futures, currency exchanges and futures are often considered to be more liquid as many buyers and sellers trade on the market every day that the exchange is open.

a-b

Here,a=Ask bid,b=bid price.

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