What is one consequence of a high bid-ask spread?

A high bid-ask spread indicates that there is a significant difference between the price buyers are willing to pay (the bid) and the price sellers are willing to accept (the ask). This widening of the spread often occurs in markets with lower liquidity, where fewer buyers and sellers are participating in trading.

As a result, the higher bid-ask spread directly translates into higher trading costs for investors. When an investor buys a stock, they pay the higher ask price, and when they sell, they receive the lower bid price. The difference between these two prices represents a cost that investors incur each time they transact in the market. Therefore, in a scenario where the bid-ask spread is high, investors effectively lose more money when they execute trades compared to markets with narrower spreads.

This consequence affects investor behavior and overall market dynamics. High trading costs can discourage trading activity, impacting market liquidity and efficiency in the long run.