Steemit Crypto Academy- Season 4 Week 1 [Beginners' Level- Homework Post for Professor @awesononso]

maazmoid123 (69)Beginner[2,4,5,6,7,9]in SteemitCryptoAcademy • 3 years ago

Hello Everyone, so today I invite you all to read today's Homework on The Bid-Ask Spread subject which is given by Professor @awesononso.

So let us continue with our homework.

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Question no.1
Properly explain the Bid-Ask Spread.

Bid and ask spread can be properly understood only if we know about their respective meanings.

The term bid refers to the amount the buyer is eager to pay whereas ask is the term used for the amount at which the seller is willing to sell the asset.

For example: if a stock quotation has $35 and an ask of 37$ then the person who wants to purchase will be willing to give 37$ whereas the person who is willing to sell will sell it at $35.
Spread is basically the difference between the bid and ask price.
So, mathematically presented as;
Bid-ask spread = ask price-bid price.
Bid-ask spread = $37-$35
= $2

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Question no. 2
Why is the Bid-Ask Spread important in a market?

As we know that the bid-ask spread is the difference between the bid and ask prices and the liquidity phenomenon highly depends on the spread. The liquidity of stock basically determines whether the stock can be sold easily or not.

If the spread is large or broad, it supports the idea of lower or narrow liquidity and this large difference of the ask and bid prices can be in turn risky for trading.

So, when we have a narrow bid-ask spread, the stock liquidity increases. High liquidity means that more stocks are being bought and sold. This offers less risk in trading and the stock market grows.
In short, this large and small spread determines the direction in which the market moves i.e., whether it goes uphill or downhill.

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Question no. 3
3. If Crypto X has a bid price of $5 and an ask price of $5.20,
a.) Calculate the Bid-Ask spread.
b.) Calculate the Bid-Ask spread in percentage.

Answer(a)
Bid-ask spread = $5.20-$5
Bid-ask spread = $0.20

Answer(b)
% Bid-ask spread = spread/ask price ×100
% spread = $0.20/$5.20 ×100
%spread = 3.846%

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Question no. 4
If Crypto Y has a bid price of $8.40 and an ask price of $8.80,
a.) Calculate the Bid-Ask spread.
b.) Calculate the Bid-Ask spread in percentage.

Answer(a)
Bid-ask spread = $8.80-$8.40
Bid-ask spread = $0.40

Answer(b)
% Bid-ask spread = spread/ask price ×100
% spread = $0.40/8.80 ×100
% spread = 4.545%

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Question no. 5
In one statement, which of the assets above has the higher liquidity and why?

To understand the liquidity, we have to take the spread into account. Liquidity is expressed in an inverse relation with the spread. With our calculations, we got the result of a $0.20 spread in crypto X and a $0.40 spread in crypto Y. Based on these calculations, we can conclude that crypto X has higher liquidity than crypto Y because the lower the spread, the higher will be its liquidity.

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Question no. 6
Explain Slippage.

The term slippage refers to the difference between the amount at which the trade is expected to occur and the price at which the trade actually occurs.

For example: I requested to buy 25 stocks at 500 Pakistani rupees but when the trade actually occurs it costs me 450 Pakistani rupees instead. This difference between the expected and the actual executed price is known as slippage.
This type of slippage may occur when the market is highly volatile with consecutive fluctuating prices. The bid-ask spread also plays a vital role in slippage as indicated by a positive slippage in the narrow bid-ask spread and a negative slippage in the wide bid-ask spread. Now, the positive and negative slippage will be explained in Question#7.

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Question no. 7
Explain Positive Slippage and Negative slippage with price illustrations for each.

Positive slippage means that the trade occurred at a price lower than expected.

For example, I want to buy a stock at 40 rs which is the current market price at that time so, I fill in the order and then I get to know that the best available price is 37 rs that is much lower than the expected price. My order is now placed at a lower than expected price making it a positive slippage.

Now, coming to negative slippage. We can undoubtedly assume that it will be opposite to positive slippage.
So, negative slippage means that the trade occurred at a price higher than expected.

For example: Again, I want to buy a stock at the current market price that is 40 rs. I fill in the order and then I get to know that the best available price for the stock is 42.5 rs. My order is now placed at a price higher than expected and the slippage in action is known as negative slippage.

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Conclusion

As we all know that before entering into any market one should know about the market or already have done good research or analysis of the asset or of the market. So by the Bid-Ask spread the traders can get the idea of the liquidity of the market, as the high Bid-ask spread has low volatility in the market, while the small bid-ask spread has the high volatility in the market.

So that was all from my side.

Regards,
@maazmoid123

#awesononso-s4week1 #cryptoacademy #steemexclusive #pakistan #analysis