Two stock market based costs of liquidity that affects the cost of capital are the:
A) bid-ask spread and the specialist spread.
B) market impact cost and the brokerage costs.
C) investor opportunity cost and the brokerage costs.
D) bid-ask spread and the market impact costs.
E) None of these.

Question

Quizplus · Accepted Answer

The bid-ask spread and market impact costs are both costs of liquidity that can affect the cost of capital in the stock market. The bid-ask spread refers to the difference between the highest price a buyer is willing to pay for a security (the bid price) and the lowest price a seller is willing to accept (the ask price). This difference is essentially the cost of trading the security and can affect the cost of capital. Market impact costs refer to the cost of trading a security based on the impact that trading has on the market as a whole. For example, if a trader is trying to purchase a large number of shares in a single company, that trader's actions could drive up the price of the security, resulting in higher costs for liquidity. Both of these costs can impact the cost of capital for investors in the stock market.

Two Stock Market Based Costs of Liquidity That Affects the Cost